All Eyes On The Fed Today—And How To Handle Equity Market Volatility For Your Portfolio

Extreme market volatility—with the associated fear and greed—can lead investors to make emotional rather than logical decisions. And market timing can be an expensive habit.

Stocks are moving in lockstep again, in risk-on/risk-off fashion. The current market focus is on Fed action and higher borrowing costs challenging economic growth. Last week the hotter-than-expected August CPI sparked a S&P 500 decline of more than 4 percent on Tuesday, with growth stocks tumbling even more than 5 percent. For perspective, last Tuesday was the worst day of performance for the S&P 500 since mid-2020, when we were dealing with news of the Delta variant and its impact. Further, last week’s market action followed two sessions in which 400 of the 500 stocks in the S&P 500 rose.

It is hard to stay the course being invested when there are such extreme market movements. Depending upon how our stock portfolios are positioned, many of us feel brilliant, lucky, or just plain scared—

While volatile times can set the stage for active managers to shine, the price for getting even a few things wrong in today’s volatile and correlated markets is costly. And we already know that there are few active managers who actually outperform the market over time.

Bad timing can significantly penalize any investor, especially when they are not invested during the biggest single-day market gains. According to Bloomberg News, non-investment for the best five days so far in 2022 increases the S&P 500’s year-to-date loss to 30 percent from 19 percent. For more on this topic, please see my earlier column about the danger of missing out on big market movement days- “Why Market Timing Is Still A Bad Idea”.

So staying invested is essential. According to Olivia Schwern, Global Investment Strategist at JPMorgan, there have been 51 days since 1980 during which the S&P 500 dropped more than 4% in a single session, as it did last week. 21 of those days happened during the Global Financial Crisis in 2008/2009, and another 9 occurred during 2020. After each instance, the market recovered to make new highs.

And next, harnessing the power of long-term diversification in your portfolio is crucial. Yes, fixed income can be your friend—in fact, many investment professionals specifically consider fixed income the ballast in their portfolios which allows them to have increased equity exposure. JPMorgan reports that while rolling 12-month stock returns have varied widely since 1950 (from +60 percent to -41 percent), a 50/50 blend of stocks and bonds has not suffered a negative annualized return over any five-year rolling period in the past 70 years.

I add the caveat here that one also needs to take into consideration one’s investing timeframe—for example, if you are retired at age 60, you may want to recheck the diversification in your portfolio and run a lower risk profile. No one wants to get caught with a finite timeframe in declining markets.

Well-formulated, diversified multi-asset portfolios help investors achieve financial goals through all types of market environments. As the chart below from JPMorgan further illustrates, from current levels, the market needs a 25 percent return to get back to previous highs. Even if it takes three or four years, the average annual return needed—at 9 percent or 7 percent, respectively—presents around historical norms.

Sure, it is tempting to predict market direction, but a well-formulated and diversified portfolio remains the safest way to participate in volatile markets.