In a book well-suited for current times, “Anxious Kids, Anxious Parents,” there is a chapter titled, “It’s Actually Not Breaking News.” The authors inform readers one of the first steps in managing worry is to expect worry. While this is great advice for parents, we believe it’s also great advice for investors.
“Many anxious families treat the normal arrival of worry as breaking news, even if it has happened repeatedly in the past…parents often escalate right along with them, surprised and frustrated that it’s happening again.” Instead parents should, “Expect to worry—it’s normal, it’s common, and it can be helpful.”
As investors, we know to expect volatility in the stock market. Yet, every time the market experiences a significant sell-off, our natural inclination is to treat it as breaking news. Many media outlets certainly do.
However, we must remind ourselves: “We expect market sell-offs, it’s normal, it’s common, and there can be opportunity in volatility.”
What’s Happening Now
Following the latest sell-off, the S&P 500 Index is down -17.2% for the year through May 18, 2022, and is teetering on the verge of a bear market, which is defined as a decline of -20% or more. The Bloomberg Barclays Aggregate Bond Index is down -9.8% over that same time.
The near-term outlook for the economy is not good. Inflation remains stubbornly high, the U.S. Federal Reserve is tightening financial conditions to combat high inflation, and there’s now evidence inflation is negatively impacting corporate profits following disappointing earnings reports from Walmart and Target this week.
If we are in a bear market, history provides little solace as the average bear market lasts 15 months with an average drawdown of -33.8%. We believe investors should be prepared for turbulent markets to persist as the market finds the bottom.
What To Consider
Despite the market sell-off and a less-than-rosy outlook, in our opinion, there are reasons to be optimistic. We believe the current turbulence is the result of an economy that boomed over the past several years and is now overheating.
The Consumer Price Index is 8.3%. The Case-Shiller U.S. National Home Price Index shows home prices up 18.8% in 2021. The unemployment rate is at a low 3.8%, and the JOLT Jobs Opening index is at record highs. In order to cool an overheating economy, the U.S. Federal Reserve is raising interest rates and ending their bond buying program known as Quantitative Easing. Financial conditions are tightening and asset prices are adjusting to reflect the tighter financial conditions.
Eventually, higher interest rates and tighter financial conditions should slow the economy, remove many of the excesses that built up over the past few years, and lower inflation rates to more sustainable levels. This is a very healthy process in the long run.
To us, this feels like a typical business cycle in many ways. It certainly does not feel like 2008 when the entire global financial system was at risk.
What Can I Do?
As always, the real question is what investors should do. First, many of our clients can be thankful for portfolio actions taken prior to the storm. Many of Curi Capital’s clients are in globally diversified portfolios that include assets other than stocks and bonds. We also avoided the more speculative corners of the market like hot tech stocks, SPACs, cryptocurrencies, etc.
In addition, many clients have significantly reduced their equity exposure as they neared or entered retirement.
As for what we can do now, investors can take advantage of many different strategies, including:
- Harvest unrealized tax losses
- Trim overweight positions that now have less embedded gains to purchase positions that are underweight (rebalance)
- Increase contributions to investment accounts and retirement plans to take advantage of lower investment prices
- Utilize dollar cost averaging when investing new cash into the market.
- Invest cash in money markets and very short-term bonds that now pay a higher rate than they have in the recent past.
- Look for long-term investment opportunities that are now more attractively priced
Investors who qualify should also consider private investments.
In short, we believe there are many ways to take advantage of the current market volatility that do not involve panicking.
If you have any questions about your portfolio, wish to take advantage of the strategies discussed above, or are unsure if your portfolio is set up to weather market volatility (or, more importantly, to achieve your long-term goals), please reach out to a member of the Curi Capital team at 984-202-2800.
 Wilson, Reid and Lynn Lyons. Anxious Kids, Anxious Parents. Health Communications Inc, 2013.
 Bloomberg Finance, LP
 Grabinski, Ryan. Strategas. 13 May 2022. “Daily Macro Brief”
 Bloomberg Finance, LP
Please note: This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Curi Capital is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about Curi Capital can be found in its Form ADV Part 2, which is available upon request.
Past performance is not a guarantee of future results. All investment strategies involve risk and have the potential for profit or loss; changes in investment strategies, contributions, or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and indexes do not reflect the deduction of the advisor’s fees or other trading expenses.
This month, we sat down with Beth Dalton, Chief Compliance Officer, to discuss her transition to the Curi Capital team following the KDI acquisition, the evolution of her career, and…
The third quarter was another volatile quarter for markets as central banks around the world continued hiking interest rates to get high inflation under control. The S&P 500 rallied 17.7%…
This month, we sat down with John Day, Managing Director of Equities, to discuss the evolution of the industry and his career, shift to the Curi Capital team following the…