Staying calm when the markets are turbulent
Watching markets drop precipitously is never easy. The past few days have been difficult for equities, with yesterday’s 4.1% drop the largest since 2011, erasing the year-to-date gains. The basic macroeconomic environment remains positive: corporate profits are increasing; interest rates and inflation remain historically low; the latest employment report showed solid hiring and strong hourly earnings gains. While this is positive news, it may signal rising inflation, triggering concerns that the Federal Reserve will move more quickly than expected to raise interest rates, which could restrict economic growth.
It’s not unusual market behavior
We believe it is important to remember that healthy markets do correct from time to time. This market downturn comes at a point when investors have been highly complacent. In our market analysis and client communications, we have noted that it has been a long time since the markets have seen a significant correction and that it would not be surprising if a drop in the 5% to 10% range did occur in the months to come. Where we believe it is warranted, we have made adjustments to portfolios to reflect this possibility.
A long-term approach
We anticipate that volatility will continue in the near term, given uncertainty over interest rates, inflation and the impact of the new tax laws on the economy, corporate profits and the U.S. debt. It is our view that equity investments still offer the best potential for long-term wealth preservation and growth. Our expectations for long-run returns for investment asset classes are unchanged, therefore, we are maintaining our strategic asset allocation ranges. However, we are carefully positioning client portfolios, looking to favor investments that may be more resilient to the risks ahead.
As always, we are watching the markets carefully, monitoring developments both domestically and globally. Our goal is to dampen the “noise” in the market, while remaining open and responsive to long-term movements. Strategic asset allocation remains the foundation for building a diversified portfolio designed to weather the vicissitudes of the temporary market volatility, benefit when possible from short-term opportunities, and help protect against risk.
We are here for you
We believe communication is critical to an enduring relationship and we encourage you to contact us with any questions you may have regarding current markets or your portfolio.