Uneasy Investors Should Focus On What They Can Control
Paul Fain, CFP®
Current events remind me of a rip current at the beach. Once swept into it, you have two choices: 1) fight against the undertow and risk a bad outcome; or 2) go with the flow until you are carried to calmer, more predictable waters.
It’s a scary experience. In the moment, you feel out of control and it requires an uncharacteristic confidence to go with the flow.
As we approach the end of the first quarter of the year, what currents are trying to pull us under?
The expectation of a recession and economic slowdown continues to linger despite some recent positive data. “Our base case remains that there will be a shallow recession in late 2023,” project the experts at Vanguard in a March report. This might entail a weakening job market, layoffs and downward pressure on the stock market. Recessions historically haven’t lasted very long — about 10 months on average.
Inflation was our major concern at the beginning of the year, but it is declining. “Bringing inflation down was never going to be easy and we were going to see an economic slowdown associated with that course,” states Joe Davis, Vanguard’s global chief economist.
Is another banking crisis emerging, like 2008? It is unlikely but still, “This is going to be pretty bumpy going forward,” says Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser at Allianz. Are our deposits safe? “Yes,” adds El-Erian. General opinion is that most U.S. banks do not face the same liquidity pressure as Silicon Valley Bank recently did. Also, maintaining financial stability is now the top priority of the Federal Reserve, even over inflation.
Geopolitically, U.S. economic and market turbulence could intensify if shocks occur in the Ukraine conflict, in our relationships with China and Iran, or in changes to the global oil supply. “Conversely, there are brighter scenarios that … could play out if global shocks dissipate, if we see continued resilience from consumers and corporates due to relatively healthy balance sheets,” according to Daleep Singh, PGIM’s chief global economist and head of global macroeconomic research.
Investors entered 2023 holding their collective breaths. This year, with heightened volatility, the stock market has basically moved sideways. Sea changes are evident though as value stocks have outpaced growth stocks over the past 12 months, and markets are moving from narrow (tech) to broader opportunities. If you have new money to invest, consider dollar-cost-averaging in 2023. Just sitting in cash is probably not a great option for a forward-looking investor.
All said, it is important to focus on what we can control. Take steps to boost your confidence. Don’t get in the water without a flotation device. For example, you can have clear investment goals. You can develop an appropriate asset allocation strategy using low-cost, diversified funds. You can stick to your investment strategy, because it is market risk that leads to long-term portfolio growth.
Finally, to maintain perspective and discipline beyond today’s rip currents, remember that life events, not market news, should drive your financial planning and investment decisions.
This article originally appeared in the Knoxville News Sentinel online March 24, 2023.
