It’s amazing how much can change in a month. At the end of February, most of us were focused on the usual suspects that tend to draw the market’s interest. We watched where interest rates were heading, what AI might mean for the economy, the ups and downs of energy prices, and the ever-present question: are we headed for a recession, or not? Iran wasn’t really on our radar in the way it is now.
Fast forward to today, and the headlines look very different. Even though this can feel unsettling, we want to remind you that your portfolio wasn’t built on yesterday’s news. The way we diversify our investments helps us be better prepared for the unexpected.
The market is definitely reacting to what is happening in the Persian Gulf. Through March 27, the S&P 500 is now down 6.7% with bonds, developed international and small cap all wiping out gains from the first two months and moving into negative territory. Only emerging markets (+2.7%) and commodities led by energy are in positive territory.
Sometimes it’s not just what we invest in, but what we avoid. A month ago, some investors were clamoring for precious metals. IAU, the Gold ETF, has dropped 14.25% in the past month, SLV, the Silver ETF, is down an even worse 21.14%.
Interest Rates: What’s Next?
While we were debating whether the Fed would side with weaker job numbers and lower rates or look at the stubborn inflation numbers at around 3% and maintain rates was the debate. While the Fed typically views quick increases in energy prices as more transitory and not permanent. The size of the move in oil prices combined with the potential for damages to the infrastructure and the uncertainty around the end point will probably keep the Fed from lowering and it now introduces the real possibility of a rate hike. The most likely outcome is that we remain on hold for now.
Recession Talk: Where Do We Stand?
Are we heading for a recession? The U.S. economy has some inherent advantages including less overall dependency on energy as percentage of our economy and the fact that we are a net exporter of energy. Despite this, it will weigh on the consumer. Much of the anticipated stimulus from the extension of tax cuts as part of the OBBA will be wiped out if the Gulf War persists or oil prices climb even higher. The challenge the Fed faces is they want to increase rates to fend off inflation, but may face economic weakness. While recession is not the most likely outcome, the odds rise with each day the Iran conflict continues.
AI and Innovation: Keeping an Eye on the Future
Artificial intelligence is still making waves, driving big changes in how companies operate and grow. While we have had concerns about the growing exposure to a small number of companies including the Mag 7 that have had such explosive growth over the past few years, we may be looking for AI investment and infrastructure to again help drive the economy and the markets.
A Look Back: How Markets React in Times of War
It’s easy to get caught up in the moment, but history tells us markets can be surprisingly resilient in times of conflict. In many cases, after a shaky start, they recover and grow over the long haul.
This is why we always come back to your plan and your asset allocation. We want to make sure you can confidently stay invested through all kinds of headlines. When we talk about preparation for a down market, we are talking about how much exposure we have to losses and correspondingly, how long and challenging it is to recover from those declines. Looking at the chart below reminds us of the power of being diversified. Using the COVID downturn as an example, you can see that a 60% stock and 40% bond portfolio only had a 19% downturn compared to 30% of the overall market and a quicker recovery back to even.
Remember: Your Plan is Built for the Long Run
We know these times can feel stressful. Planning ahead and setting the right risk level can help you stay on course. If you have questions or just want to talk through any of this, don’t hesitate to reach out. We’re here for you, every step of the way.
