Even though we are heading into the spring, it seems as if the market bulls are hibernating as the market bears awaken. No matter how much preparation and planning investors do to diversify portfolios, establish proper asset allocation and focus on long-term goals, it can seem like that is never enough when facing market volatility.
As you know, one of the firms that we invest with is Dimensional Fund Advisors (DFA). We are sharing a few DFA charts that illustrate both the short-term downturns and also the longer-term returns from multiple asset classes. Also included is a piece from DFA Vice President Wes Wellington that looks back at various periods that have impacted equities.
Let’s set the stage though. Two years ago, we were in the midst of a global pandemic. There was an upcoming election and increasing concerns over a possible recession and higher inflation. With expansive monetary and fiscal stimulus, many worried whether taxes would need to increase. Today, the same issues are still here, but the priorities have shifted. There are real concerns about the war in Ukraine and the uncertainty resulting from the geopolitical crisis abroad. Additionally, while there are less headlines about the tax policy, inflation has become an increasing issue affecting consumer pocketbooks and triggering recession fears.
It can be hard to reconcile all of these concerns with other factors that show the continued strength of the U.S. economy. The incredible medical and technological innovations of the past two years will benefit us for decades to come. The abating of the pandemic is fast and ongoing. In spite of inflation, there are indicators that consumer spending is strong, as are the labor market and business confidence.
In terms of the quarter’s performance in the markets, stocks had a tough start in 2022 as the tech-heavy Nasdaq led the way down. U.S. value stocks performed far better than growth stocks. International stocks, while also down, did better than many U.S. equities. It is not hard to imagine why equities declined-with not only the Ukraine conflict arising, but also serious manufacturing issues, higher energy costs, supply chain issues and an ongoing covid quarantine in many parts of China.
What did surprise many investors is the bond market. Bonds had one of the worst quarters in decades; interest rates spiked in the first quarter and inflation rose and rates seem to be on the verge of inverting. An inverted yield curve occurs when short-term interest rates are higher than longer-term rates. In most circumstances, longer-maturity bonds have higher interest rates than shorter-maturity bonds, reflecting that there is more risk for holding longer-term bonds. Inverted yield curves are generally associated with a future economic slowdown. Think of an inverted yield curve as the check engine light that suddenly goes on in your car. It says, “Pay attention, get things checked out.” For your portfolio, it can be a signal to check your allocation, review your planning strategies with us, make sure you have some cash, and remember that markets move up AND down.
It’s easy to be optimistic when markets move up. It’s when markets move down that we need to remind ourselves that there are always shocks, even when they are expected. It is not about hedging against any one risk, which could mean making yourself vulnerable to something else. It’s about diversifying against a number of risks, which is how your portfolios have been constructed. What should always be on the front burner are the research-backed fundamentals and principles of investing. The included charts and Wes Wellington’s piece help remind us that when the headlines are designed to create anxiety, we need to stick with the fundamentals of investing and a long-term perspective.
Jason Zweig, financial writer at the Wall Street Journal, had some great advice recently about how to deal with market ups and downs.
“It isn’t investments that get tested in turbulent markets; it’s investors.”
“What matters isn’t what the market does—but what you do in response.”
“Form positive habits and improve your investing hygiene.”
Those words of advice are absolutely critical. It is hard in the moment to remember that investing involves times when markets decline. As rational as we may think we are, it is all about managing our emotions in the short term. In uncertain times like these, we remind ourselves of the resiliency of our portfolios, the markets and economy, and the human spirit.
Modera Wealth Management., LLC (“Modera”) is an SEC-registered investment advisor with places of business in Massachusetts, New York, New Jersey, Pennsylvania, North Carolina, Georgia and Florida. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. SEC registration does not imply any level of skill or training. For information pertaining to our registration status, fees and services, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov) to obtain a copy of our disclosure statement set forth in Form ADV Part 2A. Please read the disclosure statement carefully before you invest or send money.
This commentary is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.