Thoughts on Today’s Market Environment (as of 3/3/2022)
Several years ago, one large money management firm ran a test on their clients. Whenever the stock markets declined, they sent “calming” letters to half of their clients and no specific communication to the other half. The result was unexpected. The clients who received the letters were more likely to sell their investments than those who did not. This was the opposite of the firm’s intention; the letters worried their clients enough to make emotional decisions, often selling right before the markets started their recovery.
I trust this letter will not scare you.
Last week we reached “correction” territory as the US stock markets touched losses of 11.7% year-to-date. The bond market also showed weakness, with a decline of 4.2% this year. Spiking inflation, the Ukraine invasion, and potential interest rate hikes have all contributed to these declines.
This week I received two calls asking about the market losses. Ironically, these calls were from reporters asking how I’m responding to my panicking clients. Imagine their surprise when I told them they were the only ones calling!
Even though clients are not calling, I know that stock and bond market losses are stressful. Big declines might trigger one of the following responses:
- Fight – An investor aggressively doubles down on their investments to compensate for temporary losses.
- Flight – An investor sells everything, locking in permanent losses.
- Freeze – An investor puts their head in the sand, stops looking at their investments, and does nothing.
If we find an angry bear in the middle of our hiking trail, swinging a stick (fight), running in the opposite direction (flight), or playing dead (freeze) might be good responses, but fight/flight/freeze are terrible strategies for investors.
My strategy: Rethink.
I’ve spent the better part of the last week following my favorite economists, money managers, and political scientists and their views on the potential impacts inflation, Russian aggression, and Federal Reserve policy might have on the stock and bond markets. Of course, nobody has a crystal ball and opinions vary, but I found plenty of helpful information.
Although my starting place is to “Don’t just do something, stand there,” rethinking has led me to the following:
- I’m not fighting – I’m not aggressively rebalancing or wildly investing cash (if available) at this time. I’m not confident the stock market has fully incorporated the risks we are currently facing.
- I’m flighting (one position) – Most clients have a 3% to 6% position in a Frontier Market Bond fund. Even though this fund is one of the top performing Emerging Market Bond funds and has had positive performance over the last year, its small exposure to Ukraine and Belarus makes me nervous. I reduced this position in most client accounts this week, with the expectation that I’ll reenter this holding when we have more stability in the region.
- I’m sticking with the plan – Client portfolios were defensively positioned well ahead of these market declines, which has helped as fixed-income holdings have outperformed the bond indices, and alternative investments are showing strength. I see no reasons to make any major allocation shifts at this time.
I hope you find these comments helpful. As always, please contact me with any questions that come up.