How to Effectively Weather Market Volatility: 5 Considerations for Investors
Volatility has returned to stock markets with intraday swings in major indices that haven’t been seen since the regional bank panic two years ago. This time, tariff and trade policy are center stage.
Corrections are a feature of a properly functioning market, but caution is warranted during periods of considerable uncertainty. Putting volatility in perspective and maintaining a long-term focus can help investors weather market fluctuations. Market volatility can also present opportunities for investors who remain disciplined and approach investments in the context a well-diversified asset allocation strategy.
Gain insights into recent market activity, volatility, and economic policy shifts that can help you make informed investment decisions.
Recent Market Activity
- Tariffs. Tariff activity evokes concern for increased inflation and the potential impact on market growth. However, tariffs on their own aren’t necessarily inflationary and shouldn’t contribute to the long-term inflation argument given no other stimulative measures.
- Federal Reserve Activity. The Fed is speaking with a dovish tone. Although it acknowledged the inflationary aspects of tariffs, the Fed added the caveat of their transitory nature and the possibility of higher-than-expected inflation in the short term. Growth headwinds are more of a concern. The Consumer Price Index (CPI) and Producer Price Index (PPI) readings came in lower than expected in March. Short-term outliers, like egg prices, have crashed and energy and gas prices are down. These activities position the Fed to respond accordingly if tariff-induced growth concerns become a reality.
- Interest Rates. The current administration has indicated it wants to lower interest rates for consumers and businesses. The President and Treasury Secretary have continued to telegraph their desire to lower these rates. They have no direct control over this and neither does the Fed, as the 10-year Treasury yield serves as the benchmark for other interest rates.
- Inflation. Primarily driven by economic growth, inflation expectations, and US credit rating, the 10-year Treasury yield is a key indicator of investor sentiment about economic conditions and stability. The Department of Government Efficiency (DOGE) is disrupting these conditions as it’s being used to cut the budget deficit and debt. This, along with short-term growth concerns could lower the 10-year Treasury yield, which is more accommodative for real estate and lending.
- Other Market Factors. Consumer spending is level but is slowing, not contracting. Job switch rates have fallen as employees don’t have the leverage to switch jobs for better salaries. Both are indicators of decreasing inflation, as the ability to garner more wages and desire to spend are in check.
A Deeper Look at Market Technicals
Credit Spreads
As growth and recessionary risks get priced into the market, the yield an investor demands from riskier assets goes higher. This is quantified as the spread or additional yield in excess of the risk-free rate with an equivalent maturity, also known as a US Treasury.
Investors want more return for more risk. Credit spreads aren’t blowing out, which would demonstrate an excessive amount of risk being priced in. Concerns for the growth and health of corporations would see credit spreads widen substantially more than the current market has seen.
Bonds usually dictate credit concerns by widening spreads and then equities respond. This isn’t happening, indicating equities are responding to headline risk not individual corporate risk. Equities have been acting as the cushion in the capital stack, without any residual impact on the more senior components of that stack that would signal a greater risk.
Index Indicators
The VIX Index, a popular measure of stock market volatility, is elevated but jumping around. Intraday moves of 8% up or down isn’t indicative of a trend but that the market is responding to short-term news.
A VIX slowly moving upwards is indicative of a down trend, we have not seen this slow directional movement. This doesn’t mean the market is out of harm’s way but shows there’s no real direction or fundamental case for the impact of the current news cycle.
Stock Market
The year started with tariff volatility and the market elevated with prices very rich. Now the average stock is down more than the indices.
The biggest stock sellers have been leveraged hedge funds that need to unwind per risk controls which compounds the short-term selling until that leverage is out. Generally, there are still more inflows than outflows.
Earnings
Earnings have been driving returns up until now and there hasn’t been a major earnings revision. The bounce predicted by analysts and the tailwind from the new administration seems to be delayed. Repricing of the market looks to have simply delayed the growth of the first half of the year to the second half versus negating it altogether. The barriers and uncertainty of our trade policy is likely the temporary speedbump being calculated into these earnings coming later than expected.
Five Considerations to Help Navigate Market Volatility
Maintain Discipline and Avoid Predicting Markets
Timing the market rarely pays off. During pullbacks investors trying to time the market tend to lose more than the temporary pullback itself. The combination of not selling at the top, taking a tax hit to sell, and getting back in is hard to do.
Investors getting out of the market during volatile headlines often don’t re-invest on continued negative headlines. Typically, they wait until there’s good news which is too late. The market typically bottoms on bad news, so waiting for good news means waiting too long. Fear of missing out eventually has them reinvesting once the recovery has passed; they hurt more than help themselves.
Pullbacks of 10% or more are normal. Buying those pullbacks tends to lead to average returns of 12% plus over the next 12 months.
Keep Things in Perspective
A common investor pitfall is to think this time is different; it isn’t.
The headlines may be different, your reaction may be different, or your interpretation may be different, but the market is still the same discounting mechanism it’s always been.
Maintain a Long-Term Approach
Elevated volatility occurs for different reasons but typically means extra risk for strategy changes. When volatility spikes, intraday moves in the market spike. Deciding based on one of those points as a reference can result in significant losses by the time a trade is executed or rebalance undertaken.
It’s prudent to stay invested through rocky times.
Consider Tactical Opportunities
Where you are in your allocation process or financial lifetime plays a significant role in implementing strategies for managing your portfolio in light unexpected market dynamics, for example:
- Tax Loss Harvest. Seek to lower your future tax bill while you can, bank losses to offset future gains or offset gains already realized this year.
- Gift Securities to Beneficiaries. Giving shares to beneficiaries during a pullback leads to less of your estate exemption being used and the rebound occurs outside of your estate.
- Roth IRA Conversion. Convert a traditional IRA to a Roth IRA while asset prices are deflated. Rebound and appreciation happens tax free in your Roth IRA and reduces your conversion tax bill.
- Allocating or Dollar Cost Averaging (DCA). If you recently had a liquidity event and plan to put a large amount of capital to work over time, consider expediting your DCA transactions to take advantage of a discount. Time is typically not on your side; the market goes up over the long term so take advantage of corrections when they arise.
- Buy the Dip. If you have additional cash to invest, investing when the news is bad can be effective. Waiting for a good news cycle when the market rebounds could be too late.
Make Decisions that Align with Your Wealth Plan
Making large strategy or allocation changes during volatility can increase risk. Align changes to your long-term wealth-building plan. Making changes based on political activity or current news cycles isn’t a plan and can prevent you from reaching your goals. Volatile market environments like this can be good pulse checks to determine if you really are comfortable with the ups and downs that come with your market exposure.
We’re Here to Help
To learn more about how to effectively weather market volatility, contact your Moss Adams professional.