Markets go up, markets go down. Occasionally way down. But this time it’s different.
With inflation a serious problem for the first time in 40 years, the Federal Reserve cannot come to the rescue by cutting interest rates as it did during recent market crashes. Even after Thursday’s news that the economy contracted in the first three months of the year. The Fed will push rates higher until inflation drops. Much lower.
No wonder the old Martha and the Vandellas hit Motown sticks in my head: “Nowhere to run to baby, nowhere to hide.”
In fact, if you’re a trader with a strong appetite for risk, rather than a buy-and-hold saver, there are a few market niches where you might find shelter from the storm.
S&P sector indices that track agricultural, oil and gas and steel stocks each posted gains this year approaching 40% through Wednesday. Real estate investment trusts in hotels and resorts added 17%. Health care and airline stocks rose by high numbers. Gold was up, but the single-digit gain looked slim given that the yellow metal has historically been touted as a hedge against inflation and geopolitical unrest.
I am an investor with a low tolerance for risk. But after reviewing the latest statement from my conservatively positioned retirement plan — the only funds that weren’t in the red were an infrastructure fund and a merger arbitrage fund — even I wondered if a wallet overhaul was in order.
I contacted three market professionals to see if this period is different enough to warrant a change in strategy. Everyone’s response: Don’t do anything drastic.
It’s not that investors’ fears are exaggerated. Inflation, COVID lockdowns in China, and the Fed’s plans to tighten credit all pose serious threats to economic growth, corporate earnings, and the value of stocks and bonds. Gone are the idyllic days when investors could rely on the central bank’s easy money and its large asset purchases to put a floor under financial markets.
Yet the US economy is barely hurtling towards hell in a hand basket. Yes, gross domestic product contracted at an annualized rate of 1.4% in the first quarter, the Commerce Department said Thursday. But the report also highlighted the underlying strength in consumer spending and business investment.
“The economy seems quite strong. Employment is incredibly strong. The housing market is very strong,” said Howard Needle, portfolio manager at Wellesley Asset Management.
Needle doesn’t deny the strong headwinds rocking Wall Street. He notes that a typical portfolio of 60% stocks and 40% bonds — an allocation model that many investors have relied on for decades to smooth out market swings — is off to “the worst start. of its history” this year.
Some market commentators have said the 60/40 approach simply won’t work today because stock and bond prices have fallen for an extended period, which doesn’t happen frequently. Needle disagrees, especially since there are few foolproof alternatives.
“I don’t think 60/40 is dead. I would stay the course,” he said.
Needle has some suggestions for tweaking a conventional portfolio around margins if you have the cash to invest. An expert in convertible bonds, he thinks these hybrid securities are well suited to the times as they offer a decent yield and the potential for profit if stocks rally. He also said that high-yield bonds could do well as long as we avoid a recession, and with yields rising, short-term Treasuries were becoming attractive relative to bonds. who have longer deadlines.
But don’t sell assets that have fallen in value unless you absolutely need the cash.
“We have seen a revaluation of the market. Now is probably not the right time to bail out,” Needle said.
At John Hancock Investment Management in Boston, co-head of investment strategy Matthew Miskin reminds investors to look beyond this year’s sell-off: “When you step back. . . the S&P 500 has consistently delivered above-average three- and five-year annualized returns north of 10%.
He, too, thinks rising bond yields provide an opportunity for savers and fixed-income fans who have suffered for nearly 15 years from rock-bottom interest rates. When it comes to equities, investors need to be discerning.
“In a time when it feels like there’s no place to hide, that usually means there’s blind selling between good and bad companies,” Miskin said. . And that means “it can be a good time to look for good quality businesses for sale.”
Finally, I asked Austin Litvak, director of investment research at O’Brien Wealth Partners in Boston, what questions his firm hears the most from clients.
” Obligations – what’s going on?” he said.
Yes, what sets this stock market correction apart from other recent sell-offs is that bonds don’t offer the same kind of downside protection as they have in the past.
“The ties are not permanently severed,” Litvak said. If the Fed keeps its promise to control inflation, investment in fixed income securities will return to more normal patterns.
“There is always a role for bonds in a diversified portfolio,” Litvak said.