How We Cope When the Bull is Having Serious Mood Swings

April 1, 2019

Market volatility seems to be the new normal. How did it happen, and what’s next for investors?

Despite last year’s declines in U.S. equities, we believe the bull market is not over yet, as evidenced by the recovery we have seen in early 2019. However, we do expect volatility to continue in 2019.  We view this as a natural tendency toward more normal levels rather than as signal that we are on the precipice of a downturn. Why? Let’s first take a look back at the events of 2018.

As we all remember, 2018 ended with a “bang”

BREXIT, the U.S. government shutdown and high frequency trading resulted in financial panic.

A harsh correction in the fourth quarter provided few reasons for equity investors to celebrate, despite the fact that U.S. equities did better than those in most other regions and countries last year. The late 2018 spike in equity market volatility was, primarily, the result of angst about the U.S.-China trade negotiations. But there were other contributing factors, including slowing foreign economies, Brexit, the looming (and eventual) U.S. government shutdown, and an overly tight Federal Reserve (“the Fed”). The cumulative impact of these events, exacerbated by a spike in high frequency trading, resulted in a financial panic.

What contributed to market volatility in 2018?

U.S. equity markets began 2018 in a similarly volatile fashion with rising interest rates prompting a dramatic February equity market retreat and financial markets across the globe largely moving lower during the year. Many stock markets outside the U.S. ended the year with double-digit year-to-date declines. The pullback earlier in the year was slowly reversed by higher earnings from lower corporate taxes but unfortunately, the benefits of the corporate tax relief were erased with the previously mentioned decline, approximately – 14% (S&P 500* fourth quarter).

The U.S. economy’s positive performance in 2018 (relative to most developed economies, at least) hardened the Fed’s resolve to normalize its federal-funds policy rate from the historic lows set during the global financial crisis. However, this created concern that the Fed would go too far and tip the economy into recession. This underlying concern, compounded by the hawkish tone of Fed Chair Jerome Powell’s messaging, also contributed to the increased volatility in the financial markets. That tone has since softened.

Despite it all, the U.S. economy is still going pretty strong

We are near full employment with the lowest levels of unemployment in decades. The U.S. Department of Labor continues to report that job openings exceed the number of those employed, indicating that employers continue to look for qualified workers. In addition, there has only been slight wage inflation (although more is anticipated).

Corporate earnings have been, and continue to be, mostly strong, despite lower expectations for this year. Overall, total consumer borrowing continues to grow, though at a more measured rate. Housing starts and mortgage applications continue to look strong. 

Finally, the Fed has been raising rates in a manner to maintain the economy below the overheating point. Even after several rate hikes, inflation is still quite benign.

How do investors find balance in a volatile market?

At SEI, we are long-term, strategic investors, and our philosophy is to not stray from strategic allocations as we rotate through economic and market cycles. We build strategic asset allocations specifically designed to achieve your life’s objectives, regardless of changing market conditions. We rely on the managers we have hired to stay true to their portfolio strategies and make the necessary adjustments to exploit their strengths in different environments. Each of these managers, and the allocations among the managers, are chosen for their attributes in the context of the overall strategy. Their goal is to best position the portfolio for the current phase of the market cycle. 

Even if we do experience another correction, given it is not initiated by something severe, we should view this as an opportunity to “buy on the dip” (investing after a recent decline) and do what is needed to stay the course.

As long-term investors, our strategic shifts are not dictated by market conditions.

Your goals-directed  portfolio is designed to meet the financial objectives of your goals.  As long term investors, our strategic shifts are not dictated by market conditions. And while we can make changes to your portfolio’s asset allocation, we will do so if market conditions become extreme or if your risk tolerance has changed meaningfully. But, this does not mean we will be idle during times of stress — we select and evaluate our managers on their ability to take advantage of the scenarios we see across the entire economic cycle.

We always encourage you to contact your personal business manager or investment strategist with any questions you have about the markets and/or our investment strategies. He or she will be able to review each of your investment strategies and reassure you that we are adept experts at managing for the long run.

Legal Note

*S&P 500 Index: The S&P 500 Index is an unmanaged, market-weighted index that consists of 500 of the largest publicly-traded U.S. companies and is considered representative of the broad U.S. stock market.

SEI Private Wealth Management is an umbrella name for various life and wealth advisory services offered through SEI Investments Management Corporation (“SIMC”). This presentation is provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company. The material included herein is based on the views of SIMC. Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results. This presentation should not be relied upon by the reader as research or investment advice (unless SIMC has otherwise separately entered into a written agreement for the provision of investment advice).

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