How to Respond to Current Equity Market Volatility

Equity market volatility, or the up and down fluctuation of the equity market, is normal. Recently, we’ve seen this volatility in the U.S. and across the globe.  

Where is this volatility coming from, and how should we respond?  

Here are four insights to help you understand current equity market volatility. 

To grasp the big picture of equity market volatility, rewind to the COVID-19 pandemic. During the pandemic, consumers saved more and spent less, building a pent-up demand for goods and services. As Covid eased, consumption surged. 

Since then, the economy has started to normalize, and that normalization cycle affects consumption, the economy, and the equity market. 

Simultaneously, a handful of stocks – predominantly large, tech-oriented companies – dominated the risk and return profile of the market, generating tremendous gains along the way.  

Now, against the backdrop of a normalizing economy, those big, overvalued names are experiencing volatility. Indices are biased towards the big-name stocks, so when those stocks are volatile, the whole market appears volatile. 

One catalyst for much of this current downside volatility was the Bank of Japan’s interest rate hike implemented to preserve their currency. This situation is stirring the belief that the U.S. economy may be heading toward a recession.  

The reality is that the Federal Reserve has intentionally taken steps to slow the economy and return it to its normal, long-term trend. We are seeing the lagged effects of their actions amidst volatility.  

At Credent, we manage clients’ investment portfolios based on their financial plans while upholding a long-term perspective and avoiding the trap of overconcentration.  

For example, we construct portfolios that allow us to participate in the returns of big names in the stock market while maintaining a buffer of downside protection.  

This intentional portfolio construction results in a notably better risk management outcome for our clients during volatility. As such, our clients often don’t feel the ups and downs of the market as acutely. 

No one can time the market, but using data along the way and being strategic with the risk backdrop helps tremendously.  

During volatility, investors start asking questions:  

• Should I go to cash?  
• Should I buy more bonds?  
• Should I exit my portfolio entirely? 

The simple answer is no.  

For those who try to time the market, failure to get back in the market at the right time can be more detrimental than staying invested throughout volatility. 

Remain a long-term investor, stay diversified, and ride the volatility with an intentionally structured portfolio.  

The labor market has tightened, meaning there are fewer open jobs in the economy, and unemployment has grown to 4.3%. The media emphasizes that this is the highest unemployment rate of the last two years. 

Although the Federal Reserve intended to slow the economy, should investors be concerned about the potential for a financial crisis like we’ve seen in the past? 

Drawing comparisons between today’s economic background and that of historical financial crises is misleading. 

Think back to the Global Financial Crisis of 2008, when unemployment hit double digits, the labor market and consumption backdrop were bleak, and credit card debt and mortgage delinquencies skyrocketed.  

We are in a completely different structural backdrop today. A 4.3% unemployment rate is strong (The Federal Reserve maintains that 5% is the natural level of unemployment.), consumers are healthy, interest rates are on track to decline, and lowered rates may contribute to higher consumer spending and revenue for many companies.  

Volatility can seem scary or sudden and cause investors to believe the worst. With an accurate context for volatility and a well-structured portfolio, there is no need for outsized concern. 

At Credent, we are excited about equity market participation over the next 12-18 months, as we believe the normalization of the long-term demand trend is the basis for the next secular growth cycle.  

As that occurs, we think the market will also return to a more normalized cycle, creating the potential for the average return of a stock in the S&P 500 to be more than that of a few names concentrated at the top of the index.  

For answers about the current volatility and insights into how you can structure your portfolio, reach out to an advisor using the form below.