The Legacy Perspective April 2018

By Steve Wachs, CFP®                                

“We do our best work planning for a market correction rather than reacting during a market correction since we are never sure when they will occur or how long they will last.” Matt Quinn, CFA

Yes, that’s a quote from Legacy’s Matt Quinn, CFA that we shared in February when “Six Flags Over Wall Street” returned. The extraordinarily smooth ride of the financial markets that investors experienced in 2017 has been replaced with the ups and downs of 2018. Through last week, the S&P 500 index has had 28 daily moves (up or down) of 1% which is triple the number that occurred all of last year. In 2017, there were no daily moves of 2%. So far this year, there have already been 8 moves of 2%. Is this a surprise? In January, we wrote the following – I have added in italics an update on each of the factors that were mentioned:“We wouldn’t be surprised to see a return of increased volatility following the historically low level in 2017. As equity valuations increase with the rise in equity prices, any hint of bad news can have more pronounced effects on the fluctuation of prices. Bad news can exist in the form of earning expectations not being met (that has not happened yet), higher inflation than anticipated (inflations fears have surfaced with the introduction of tariffs), interest rates moving up more than expected (new Federal Reserve Chairman has created some uncertainty), and obviously unexpected global/political unrest (Russia, Syria, etc.)”What made this an especially challenging quarter for many investors was there were few places to hide. For the first time since 2008, both stocks and bonds declined in the first quarter. Over the past 30 years, this has only happened during 8 quarters. This was not unexpected. We have been preparing for the prospect of rising interest rates (which has a negative effect on bond values) for the past few years. That is why we embraced the use of different alternative strategies. Remember, alternatives are investments that have less correlation with the stock and bond markets, which is important during this recent timeframe. We have also employed different strategic bond managers whose approach is to protect their portfolios from interest rate risk.Despite these challenges and the increased volatility, investor returns have ended like a roller coaster ride as most of our portfolios have returned to the point where they began the year. We know that asset allocation is especially critical during these types of markets. We also know that now is not the time to react (see Matt’s quote), but to follow through with a time-tested investment plan that incorporates the discipline of rebalancing.