Wealth Insights

Setting a Course for Uncertain Markets

With possible slow growth ahead, now is the time for considering long-term opportunities and staying focused on your goals.

If you feel as though existing circumstances have created special challenges for investors, you’re not alone, says Alan McKnight, Chief Investment Officer for Regions Asset Management in Birmingham, Alabama. From fears of a global recession to plunging oil prices and stock market swings, investors have seen just about everything this year, except what they might want to see most: clear signs of stability and growth.

In addition to those economic considerations, daily news reports about the spreading global pandemic and the upcoming U.S. presidential election only add to the general sense of disruption. While some issues, such as the election, are sure to be resolved soon, investors may have to be ready for an extended period of slower-than-desired growth, McKnight says. “Combined stock and bond returns over the next seven to 10 years may be lower than their historical averages as we come away from the precipice associated with COVID-19.”

Assessing the Landscape

For investors, a first step is to consider where the investment opportunities lie in this challenging environment, and where the danger zones may be, McKnight explains. To that end, he looks at global markets and economic factors, with a nod to Hollywood, as “the good, the bad and the ugly.”

The good. “The U.S. economy was on firm footing going into this recent sell-off,” McKnight says. “It’s not immune to the impacts of the economic slowdown associated with quarantines and health issues, but with the recent advent of significant monetary stimulus by the Federal Reserve and fiscal stimulus from the Federal Government, we should see stability by the second half of the year.”

The bad. The caveat on the U.S. economy is the degree to which the recovery from the pandemic depends on government policies such as monetary easing, low interest rates, and fiscal stimulus. “At some point, the economy will have to stand on its own again with the associated consumer sentiment and spending to maintain course,” he says.

The ugly. The world economy is in uncharted territory with the Coronavirus (COVID-19) pandemic. While history has some guideposts such as the SARS epidemic and the Spanish Flu pandemic of 1918-1919, it is very difficult to forecast the long-term health and economic impacts. Another “ugly” element to the current global picture is commodities, led by low and volatile oil prices, adds McKnight.

Strategies for the Road Ahead

With such conditions in mind, now may be a time to speak with your advisor about ways to strengthen and balance your investment portfolio for the time ahead — always with a view to your long-term objectives.

Stocks. The relative strength and resilience of the American economy compared with the rest of the world suggests a greater focus on U.S. equities for particularly large, well-diversified companies, McKnight says. “They have the breadth and depth globally to generate earnings growth in spite of a weaker environment, versus smaller companies.” Larger companies may also be a reliable source of dividend income.

As for global stocks, McKnight notes that one area for caution is the developed international market. Areas such as the Eurozone have struggled recently. “They’ve got a lot to work through,” he says. Over the long term, these markets should come out of this bleak environment on better footing. “You can’t just say Italy or Spain is going to immediately bounce back given what has occurred. That’s not possible.”

Bonds. When it comes to income, of course, investors usually turn to bonds, whose fixed returns also help lower a portfolio’s overall risk. Amid continuing low interest rates, especially for U.S. Treasuries, bond yield can be frustratingly hard to come by. Investors might look alternatively to investment grade corporate bonds, McKnight suggests. “With the recent pullback in yields and higher spreads over Treasuries, high-quality corporate bonds could offer enhanced yield without taking on undue risk.”

Diversified investment strategies. Now may also be a time for investors to consider looking beyond traditional stocks and bonds to augment what may be sluggish returns and higher risks for the next several years. These strategies might include alternative investments such as managed futures, hedge funds or real estate.

Because these opportunities are so diverse, it’s important to consider with your advisor which ones might best suit the needs of your portfolio. “The key benefit is that they are non-correlated with your other investments, which means they don’t rely on stocks or bonds doing well in order to generate returns,” McKnight explains. A hedge fund or managed futures contract, for example, might be structured specifically to perform well at a time when stocks are suffering — thus offering protection against volatile markets.

Maintaining Liquidity

No matter how well you’ve prepared your portfolio to meet your long-term goals, one area that investors may be inclined to overlook is the need to periodically review liquidity needs, especially during times of volatility. As some assets or asset classes perform well and others struggle, the original liquidity balance you put in place may be skewed. In simplest terms, each individual should have a sense of liquidity requirements over the coming year and ensure it is available when needed.

Keeping It All in Context

Investors overly concerned with daily volatility may be tempted to drop out of the markets, while others may be tempted to buy and sell rapidly in an effort to beat the markets as they move up and down — both strategies with potential serious drawbacks. Pulling out means missing long-term growth opportunities and paying a premium to get back in later, while efforts to “time” the market usually fail, McKnight notes.

Instead, it’s all the more important to focus on investment strategies that support your long-term goals and to try to put some distance between yourself and the 24/7 news cycle. While today’s developments may seem uniquely challenging, “if you go back over the last 100 years, there have always been crises,” says McKnight. “A systematic approach, sticking to a process and a philosophy, will get you through volatile times, which are inevitable.”

For additional insights and links to weekly economic and market updates, be sure to visit our Coronavirus and the Markets page on Regions.com/Insights