Wealth Advisory & Planning
June 22, 2022
Seeking Sound Advice in Extraordinary Times
We are in the midst of a volatile global market environment, with U.S. equity markets continuing to experience dramatic ups and downs. Inflation remains at the high end of expectations, pressuring consumers and businesses while also forcing the Federal Reserve’s hand toward more aggressive tightening of monetary policy. In fact, at the Federal Open Market Committee meeting on June 15, the Fed raised rates by 0.75%, consistent with recently realigned consensus expectations for rising inflation. This is a clear sign that the Fed is willing and able to take a more aggressive tack to defend its price stability mandate.
State of the markets
Although the Fed has come under fire for not hiking rates sooner, the central bank has since communicated its unconstrained commitment to taming inflation, leading rate expectations higher. The longer it takes the Fed to bring inflation to heel, the harder it will be to achieve a soft landing, since a more aggressive tightening may incite macroeconomic risks that result from an increasingly restrictive posture.
Some leading indicators in the U.S. are beginning to show signs of slowing economic growth, stoking fears of economic turbulence ahead. It seems the economic expansion, now in the late stage of its cycle, is increasingly likely to tip into recession. In this late stage, inflationary pressures begin to weigh on prices and spending trends. The latest round of retail earnings reflects slowing demand as consumers grapple with higher costs and pivot their spending from goods to services. Companies that primarily target lower-income consumers have pared back profit estimates as a decline in sales weighed on results in first-quarter 2022.
We believe there is an increasing likelihood of an earnings downturn, particularly as persistent inflation begins to pressure profit margins. As the macroeconomic backdrop becomes more challenging, investors should expect downside risk to earnings.
We continue to watch inflation and the Fed’s intentions, which could be adjusted if inflation makes meaningful strides toward cooling off and the Fed senses that its own actions are becoming too much of a destabilizing force. Add to the economic mix geopolitical tensions and the ongoing war in Ukraine, with the trickle-down effects on supply chains and the price of oil, and the market waters become even murkier.
Glenmede believes strategic asset allocation, supplemented by tactical asset allocation and rigorous risk management, is key to wealth preservation. We follow a robust portfolio construction process that includes diversification by asset class, style and geography. Our goal is to build portfolios that participate in rising markets and protect in declining environments, such as we are experiencing currently.
With this philosophy as a backdrop and a commitment to clients always top of mind, we regularly review our asset allocations and adjust when market dynamics warrant. Considering the rapidly changing market environment, we recently recommended the following actions:
- Reduce the magnitude of our allocation to equities for the second time this year, resulting in a larger underweight relative to longer-term policy targets. Trimming our equity position is consistent with overall portfolio risk management in the face of rising recession risks. Small cap and international companies were trimmed by larger amounts as those companies are likely more exposed to current economic turbulence, even though they may be better longer-term investments.
- Reduce the magnitude of our overweight to global real estate alongside our portfolio-level risk reduction while maintaining significant exposure. Real estate valuations remain attractive relative to much of the equity market. Further, real estate should benefit from higher inflation and be less impacted by global economic disruptions.
- Favor short duration, investment-grade municipal bonds while reducing high-yield municipal bonds within the fixed income portion of taxable accounts. Yields have risen significantly as the Fed has hiked rates to slow excess inflation. The rise in yields has led investment-grade fixed income to appear more attractive than it has in years.
In addition to strategic portfolio management, periods of volatility provide opportunities for investors to harvest tax losses. Tax-loss harvesting can be helpful in managing short- and long-term tax liability. Incorporating exchange-traded funds, for example, into a tax-loss harvesting strategy may have advantages. We recommend discussing the particulars of tax loss harvesting with your Glenmede advisor.
We readily admit that it is nearly impossible to call a market bottom. Based on our assessment of the current and future environment, we believe the market is likely to face additional downside risks prior to the inception of the next bull market cycle. That said, proposing “one size fits all” recommendations is always fraught with issues.
The most important step investors can take during times of stress is to affirm the proper asset allocation targets for their portfolios based on their investment objectives, time horizon and tolerance for risk. For investors with a long time horizon and a higher risk tolerance, it may make sense to selectively look for opportunities within both the equity and fixed income markets, notwithstanding our cautious tone for the near-term environment. As always, we recommend discussing specific portfolio actions with your Glenmede advisor.
Sifting through the noise
Given the above, it seems like a daunting task to sift through the noise in the media to find some sound, practical advice in a volatile market. What advice does Glenmede offer to investors at this time?
In an environment with a wide array of conflicting information on the macroeconomic backdrop, investors should be focusing their attention on the deteriorating fundamentals and still-premium valuations on equities, with a bias to reduce equity allocations on market strength rather than buy on weakness.
In the current market environment, our approach to private client wealth and investment management remains consistent and our goal remains the same — to provide a framework that empowers you to make wise financial wealth decisions. During periods of volatility, it is especially important to listen through the noise and remind ourselves of key practices important to maintaining long-term financial and investment health. It is also a good time to reinforce habits of resilience that allow you to manage unsettling periods as thoughtfully as possible and explore the challenges and opportunities posed by the situation.
As a reminder, the following key habits contribute to sound financial and investment health:
- Identify your personal financial wealth goals, then develop a wealth plan and investment strategy to align with them.
- Regularly ask yourself whether your goals remain the same or have shifted over time due to changing circumstances.
- Reflect on the disciplined processes that produced your current plan and portfolio during times of high emotional and market stress.
- Refrain from making one-off changes to plans or to portfolios based on exogenous events in the markets or society or based on an exciting new planning technique.
- Remain an informed and active owner of your wealth plan and financial assets through regular dialogue with your advisors, whose insights you can call upon to answer questions.
No one can prevent market volatility, but good financial health practices allow portfolios to weather those storms without suffering lasting harm and can provide the presence of mind to recognize potential opportunities that may arise throughout all kinds of market cycles.
At Glenmede, our mission is to empower the confident pursuit of purpose, passions and legacy through integrated wealth management. During times of unsettling market volatility, it is especially important to remain focused on your financial goals and wealth plan and to explore the challenges and opportunities posed by the situation. As advisors, we are prepared to listen through the noise to help you understand your options, make informed decisions and maximize the probability of achieving your goals.
This presentation is intended to be an unconstrained review of matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. Advice is provided in light of a client’s applicable circumstances and may differ substantially from this presentation. Opinions or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable, but accuracy is not guaranteed. Outcomes (including performance) may differ materially from expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss the applicability of any matter discussed herein with their Glenmede representative.