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Is Your Portfolio Seaworthy? Navigating Global Crosscurrents

By: Kate Warne, Ph.D., CFA, Principal September 03, 2019

Today’s global crosscurrents seem swifter than usual, tossing and turning the markets around, worrying some investors. Some recent currents, such as oil  market disruptions, are likely to be short-term sources of volatility, but others are more fundamental and could drive markets over time. Separating the two – and positioning your investment portfolio for both – can help you take more control and navigate rough waters successfully.

More uncertainty and rougher seas

Over the past few months, the U.S.-China tariffs and trade negotiations have topped the news. Global stock markets have reacted positively to signs of progress but declined whenever tensions and tariffs rose. Adding to this:

  • Some of the biggest technology companies face potential regulatory challenges.
  • More tariffs are possible as other trade agreements are underway.
  • Hot spots around the world are flashing due to political unrest, military jostling and higher tensions with Iran.
  • Rising uncertainty – domestic and foreign – has led businesses to delay investments.
  • Signs of slower but still positive economic growth here and abroad are leading to periodic recession worries.

Negative headlines may make you think these concerns are the whole picture, but many of them are temporary and could reverse quickly. They’re also prompting reactions from policymakers, companies and others, creating more crosscurrents.

Policymakers to the Rescue – Concerns about; slower economic growth have prompted the Federal Reserve to consider cutting short-term interest rates as it works to extend the expansion. Long-term rates have already declined, lowering the rates for mortgages and other loans, which helps housing and other interest rate-sensitive sectors. Other central banks, including Europe’s, have also shifted toward more support, and China has been implementing pro-growth policies since the start of the year. We expect the rising tide of global stimulus to help carry stocks higher despite the choppier waters ahead.

Source: Morningstar Direct. Stock portfolio measured by the total return of the S&P 500 Index. Balanced portfolio measured by 65% stocks (S&P 500) and 35% bonds (Barclays U.S. Aggregate Bond Index) rebalanced annually. Periods: 3/23/2000–10/9/2002, 10/9/2002–10/9/2007, 10/9/2007-3/9/2009, 3/9/2009-12/31/2018, 3/23/2000–12/31/2018.

Corporate Profits Are Rising Slowly – Companies have been navigating the crosscurrents skillfully, adjusting suppliers, and in many cases they have continued to eke out higher profits despite rising costs. Although corporate earnings growth has slowed, companies have been relatively sanguine about the outlook and their ability to cope with higher uncertainty.

Higher uncertainty and rougher seas are likely to result in continued high volatility, which is typical of late-cycle markets. However, our outlook is positive due to the combined responses of policymakers, low interest rates and the still-solid fundamentals of economic and earnings growth.

Skillful navigation required

With so many distractions, it’s easy to feel confused and hesitate, but the best sailors are those who are ready for rough seas. Navigating choppy waters can require more attention as well as frequent adjustments when the currents shift.

Realistic Expectations – The S&P 500 returned 18% in the first half of 2019 as stocks rebounded from December’s pullback, which is well above our long-term equity return expectations of 5.5% to 7.5%. We don’t expect double-digit returns to continue. Moreover, don’t expect your portfolio’s returns to match the market – you likely don’t want to take that much risk and have your investments swing up and down with the stock market. A larger allocation to fixed income may lower long-term returns, but it can provide a smoother ride as it helps buffer the value of your investments when stocks drop.

The table shows how staying invested in a balanced portfolio through market cycles can help you stay on course by comparing the performance of a hypothetical portfolio with 100% in equities to a balanced portfolio with 65% in equities and 35% fixed income. The 100% stock portfolio rose higher during the good times of bull markets but also fell more sharply during the bear markets. The balanced portfolio with both bonds and equities posted higher returns, up 178% from 2000 to 2018 compared with 141% for just equities alone, as interest rates fell. We don’t expect the balanced portfolio to continue to outperform over time.

Stay Diversified and Rebalance If Needed – A well-diversified portfolio means you’ll own a variety of equity and fixed-income investments that perform differently from each other, and each investment plays a distinct role. As today’s crosscurrents keep the investing waters choppy, it’s important to partner with your financial advisor to rebalance your portfolio regularly, making needed adjustments to keep it appropriately diversified over time.

Greater uncertainty calls for greater patience and discipline, since the direction forward may not be clear. Working with a good captain can help you navigate today’s crosscurrents to continue making progress toward your goals.

Important Information:

Diversification does not guarantee a profit or protect against loss in declining markets. Past performance does not guarantee future results.

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