Question: When will all this financial uncertainty and market volatility end?
Answer: This is the question on most folks’ minds. But the savviest investors are asking: What will the investment environment look like when the volatility ends? And what will I wish I did or didn’t do with my portfolio?
What will the environment look like?
Suppose the Federal Reserve (Fed) successfully brings the annual inflation rate down to around 2%—its stated target. This is proving difficult. But if inflation is tamed, the implications are interesting. First, short-term interest rates probably will be lower but not as low as they were pre-pandemic. Long-term rates will likely be lower too, but only slightly. The unemployment rate will almost certainly be higher, but probably under 5%. This is a reasonable environment for both economic and earnings growth, meaning the market will likely recover, but probably slowly.
What if the Fed doesn’t tame inflation, and it stays stickier for longer?
Yes, the market can stabilize under these conditions. While interest rates, both short and long term, probably would be higher, investors have seen market and economic growth with 4% inflation and 5-6% interest rates before.
What will you wish you had done in either case?
- Effectively managed your cash. For the first time in a long time, you can profit from the money you’ve kept on the sideline. Make sure you invest in higher-yield, but not risky, money-market accounts or in short-term, high-quality bonds such as 12-month U.S. Treasuries.
- Prudently distributed the rest of your fixed income. Stretching out from short-term yields to more mid-term yields provides a little more immediate return. If interest rates fall, your bond values will increase giving you another nice bump in return. If rates continue rising, you’ll lose a small amount of value, but you’ll be compensated by your higher cash returns.
- Deftly allocated your stocks. While the broad market may stagnate or continue falling, not all stocks react the same to this environment. Your equity returns will probably improve if you overweight toward proven fund managers and equity-asset classes that are likely to do better in a slow-growth, high-interest environment, and then rotate out of those positions as conditions change.
What will you be glad you hadn’t done?
One of the worst mistakes you could make is moving all or most of your holdings to cash. It might feel good while the market is floundering, but the odds of making a mistake when re-entering are high. Bear markets are prone to false rallies, and you might get duped into reinvesting too soon. Or on the flip side, thinking it’s a false rally, you might miss the bottom and watch the market recover but don’t buy in.
Bear and sideways markets can last a long time, but eventually they must end, as investors will not indefinitely support unprofitable ventures.
HOW AMG CAN HELP
Talk to your advisor about your situation, cash need and risk tolerance on navigating this tricky environment.
Not a client? Find out more about AMG’s Personal Financial Management (PFM) or to book a free consultation call 303-486-1475 or email us the best day and time to reach you.
AMG’s opinions are subject to change without notice, and this report may not be updated to reflect changes in opinion. Forecasts, estimates, and certain other information contained herein are based on proprietary research and should not be considered investment advice or a recommendation to buy, sell or hold any particular security, strategy, or investment product