Is Russia Poking the Bear Market?

Please note: This update was prepared on Friday, February 18, 2022, prior to the market’s close.

Border wars in Russia and Canada, the omicron variant, plus inflation and oil prices helped send markets down, up and down again this past week. Measures to combat the spread of COVID-19, which is on the wane in many parts of the U.S., sparked anti-vax blockades at Canadian border crossings, exacerbating supply chain woes and leaving Detroit automakers in the lurch over much-needed parts. The high-stakes posturing on the Russia-Ukraine border elevated emotions and fueled worries of all-out war. And rising prices at the pump drove people to distraction as global oil supply was held hostage in Eastern Europe (more on that below).

After a decent rally on Tuesday, Wall Street traders said a big nyet to stocks on Thursday as fears of a Russian incursion into Ukraine escalated to saber rattling, tactical skullduggery and last-ditch diplomatic efforts.

While dizzying, this week’s market action is at least consistent—fast and furious. The media and market pundits seem surprised and shaken. But in our podcasts and blog posts late last year, and more recently in our first quarter webinar and Adviser Outlook, we told you that we expected volatility to pick up.

The shortsightedness around the markets’ moves may be growing even more myopic with every new decline. On Tuesday morning, after three down days for stocks, The Wall Street Journal wrote of “the steepest three-day decline since October 2020.” That sounds a little melodramatic to our ears, considering there have been 146 three-day periods when the stock market fell more than 4% since 2000—and 20 since the beginning of 2020.

Salacious stats like that are fleeting. Sure enough, by Tuesday afternoon stocks had rallied more than 1.5% before diving again. Don’t torture yourself by buying into the media hysteria. The day-to-day ups and downs of the stock market are generally random. While commentators love to find reasons for the moves, their analysis is often suspect or overly pat.

Threat of Russian Invasion Roils Oil

As noted, all eyes are watching for a possible war in Eastern Europe, with the markets reacting accordingly. Oil futures have surged to a seven-year high and the stock and bond markets have bounced around with every new development.

Oil futures trade based on expectations for prices in the near and longer term—what’s happening on the ground in Ukraine is having an impact. Russia is one of the world’s largest energy producers and provides Europe with about a third of its natural gas. In the event of a Russian attack, and NATO-imposed sanctions, Russia could wield its energy reserves as a weapon and sever supply. This would drive up already elevated oil and gas prices and spur inflation in Europe to an extent that the effect could be felt in the U.S. The Federal Reserve can raise interest rates to fight inflation, but unfortunately it can’t supply energy to the EU.

Should the standoff turn to war, we expect to see a flight to relatively safer assets. In times of crisis, some investors flock to U.S. Treasury bonds and the U.S. dollar, though we think it’s a fool’s errand to try and outrun a fast-moving geopolitical crisis. We’ve already seen some of that in recent weeks. With an invasion and the uncertainty that comes with it, we’d also expect to see continued volatility in the stock market.

Of course, seasoned stock-pickers never let a good crisis go to waste. While the human cost of a Russian offensive into Ukraine would be immense and lamentable, any market fallout will also produce opportunities that investors should be able to take advantage of. We’d much rather see diplomacy win out but are committed to our mission of helping you achieve your long-term wealth management goals, no matter what happens next.

Is It Time to Ditch Bonds?

Senior Vice President and Fixed Income Manager Chris Keith, known affectionately around the office as “The Bond Guy,” has been investing in the fixed-income market for decades through numerous market cycles. Amid rampant handwringing about bonds in the financial media, Chris wanted to share his latest thinking:

We’ve known for many months that interest rates would eventually rise, pushing bond prices lower while boosting yields. With that in mind, we have positioned our individual bond portfolios (and the bond allocation of our mutual fund portfolios) accordingly by staying away from the longest-maturity bonds, which see the most dramatic price declines when interest rates rise.

Inflation has created an additional headwind for bonds. While high prices have stuck around longer than analysts expected, the Federal Reserve will soon be stepping up to do something about it. After that, I wouldn’t be surprised to see inflation cool down and come in closer to its long-term average level of between 3.5% and 4.0% later this year.

That’s all to say that, no, now is not the best time to ditch bonds. What’s happening in the bond market isn’t a surprise. I anticipate that high-quality bonds will do exactly what they are supposed to do when investors need it the most—provide income and stability, smoothing out the impact of stock market volatility in a portfolio.

For more of The Bond Guy’s reasoned take on what’s happening in the bond market now and some historical perspective, click here.

The Rise of Machines: How ‘Algos’ Move Markets

This week’s reader question: What is algorithmic trading and is it causing the volatility we’re seeing today in the stock market?

Quantitative Investments Manager Josh Jurbala had this to say:

Great question on a very relevant topic.

First, let me explain what we mean by algorithmic trading: An algorithm is a rules-based process for performing a task, typically involving mathematics and computer-based calculations. In financial markets, “algos” execute complex calculations at a faster speed and with less human error and behavioral bias than people can achieve on their own.

In the case of trading, algorithms can be used to automate decisions and change portfolio allocations according to sets of rules. The subset of algorithmic trading most prevalent in today’s markets is called high-frequency trading (HFT). HFT firms use algorithms (along with powerful computers and extremely fast internet connections) to identify trade opportunities and execute large orders at lightning-fast speeds.

Algorithmic and high-frequency trading “grease the wheels” and improve market liquidity and price discovery. This makes it easier for buyers and sellers to transact at consistent prices, which can lower overall trading costs for retail traders and low-frequency trading investors like us. The increased volume from electronic trading can also dampen volatility and benefit stock performance, especially during positive-trending bull markets.

The main risk of HFT—which by some estimates accounts for 50% of stock trading volume—is that automated trading can also exacerbate volatility, particularly during a crisis or sudden market sell-off. This phenomenon was brought to light during the famous “flash crash” on May 6, 2010, when stocks suddenly plummeted in a matter of minutes, before recovering nearly as fast that same day.

At Adviser Investments, our tactical strategies (subadvised by our Adviser Capital division) use algorithms to measure price momentum and determine trades, regularly adjusting portfolio allocations to manage risk and follow market trends. But unlike the strategies discussed above, our client portfolios trade less frequently (over days and weeks) and in lower volume with minimal market impact. In other words, we use algorithms as a short-term means to achieve long-term investment objectives.

Long-term investors, like our clients, should not be concerned by the rise of machines in day-to-day trading. We’re very careful to make sure your portfolio is properly positioned with your personal goals and risk tolerance in mind, so there should be little need to trade intraday, and minimal chance for your portfolio to get derailed by fleeting volatility.

Chart of the Week: Dollar-Cost Averaging vs. Lump-Sum Investing—Which Is Better?

We monitor a wide range of data to form our outlook on the market and the broader economy—every week, we’ll spotlight one indicator our analysts have found informative.

By Director of Research Jeff DeMaso

Last Friday’s Chart of the Week got me thinking about the age-old investing question: To lump or not to lump?

In other words, if you have a chunk of money you want to put in the markets, should you invest it all in one go (in a lump sum) or spread it out over time (dollar-cost average)?

To compare the two approaches, I looked at Vanguard’s 500 Index fund since its 1976 inception and compared two investors, each with $1,000 to invest. One put the full $1,000 into the index fund straightaway—our lump-sum investor. The second investor dollar-cost averaged their way into 500 Index, evenly spreading their purchases out over six months. I ran this analysis 540 times, moving the start date forward by a month each time.

Over this roughly 45-year period, the lump-sum investor ended up with more money 72% of the time. That said, the average difference in the size of the portfolios between the lump-sum investor versus the dollar-cost averager was a minuscule 2.3%. At times, the differences in ending values were significantly greater (the longer lines above or below 0% in the chart below), but those times were exceptions and not the rule.

While the numbers might suggest that lumping is a better approach, in reality it discounts the human element. If markets are falling, it’s typically easier for people to wade in than to cannonball into uncertain waters.

The true takeaway from this 45-plus-year sample and the relatively small difference between the average ending account values? Choosing between the lump-sum or the dollar-cost-averaging route is not likely to determine whether or not you meet your long-term investment goals. What matters is that you set a plan, stick to it and get invested in the market.

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Financial Planning Friday
Early Retirement Playbook

The surge in early retirement during the COVID-19 pandemic (also known as the “Great Resignation”) has become a bona fide megatrend. If you are part of that trend or just thinking about retiring in the near future, here are four ways to make the transition feasible as well as fun:

1. Get a handle on your expenses. Your biggest concern is likely to be “Will my current savings be enough to meet my needs for the rest of my life?” The key to answering that question is understanding how much money you’ll need to support the lifestyle you have in mind for retirement. Our Budget Worksheet can help you get started—it allows you to compare your pre-retirement expenses and income against what you expect to spend and earn post-retirement. Also have a look at our retirement spending guide.
2. Plan for health care. Medicare eligibility begins at age 65. If you plan to retire before that milestone, it’s important to know how you’ll bridge the gap with health care coverage. COBRA—the Consolidated Omnibus Budget Reconciliation Act—may give you the option to pay to keep your employer’s health plan active for up to 18 months after you retire. From there, you can explore the private marketplace for coverage until it’s time to enroll in Medicare.
3. Evaluate your Social Security benefits. When you retire early, it’s tempting to file for Social Security benefits right away. However, that might not be your best option financially. We have a host of content on Social Security—including podcasts and a special report—to help you think through the decision.
4. Rethink your employment options. Retirement doesn’t necessarily mean a full stop to working. Consulting on a part-time basis has become an exciting career phase for many of our clients. With a lifetime of expertise and an inclination to work on your own schedule, you likely have a number of options.

After nearly 30 years of helping clients achieve peace of mind in retirement, we know that everyone’s situation is different. Reach out to an adviser if you have questions about your situation.

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Adviser Investments in the Media

Don’t miss Chairman Dan Wiener’s op-ed in MarketWatch warning Vanguard investors to steer clear of the firm’s new private equity options.

Chief Investment Officer Jim Lowell appeared on Fox Business cautioning viewers to not succumb to inflation fear.

Portfolio Manager Adam Johnson, who runs our Adviser Capital American Ingenuity strategy, discussed metaverse investments and more on Cheddar News.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade looked at the investment implications of Russia’s threat to Ukraine, while Vice President Steve Johnson addressed what could be an unhappy ending for “story stocks.”

Looking Ahead

Markets and Adviser Investments’ offices will be closed on Monday in observance of Presidents Day. We’ll be back at our desks bright and early Tuesday morning, ready to assist you.

Next week, we’ll see data on manufacturing and service sector activity, inflation gauges and a Q4 GDP revision, plus checkups on the driver of our economy, the U.S. consumer, with consumer confidence and sentiment reads, and personal income, spending and savings data.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

Please note: This update was prepared on Friday, February 18, 2022, prior to the market’s close.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.