Hurricane on the Horizon?

Take economic predictions with a grain of salt and maintain a long-term perspective

Brandon Yee, CFA, CAIA, Versant Capital Management, Inc.

JPMorgan Chase CEO Jamie Dimon warned investors last week that an economic “hurricane” was headed our way. Executives from other financial institutions, such as Goldman Sachs have echoed similar thoughts while Elon Musk said he feels “super bad” about the economy. Given these opinions from prominent individuals, investors may be feeling uneasy about the financial markets and their portfolios.

Challenging economic times call for calm market analysis, staying on your long-term investing course, and remaining disciplined. Such steps have historically rewarded investors. Diversifying globally and across different asset classes and maintaining a long-term perspective can help enhance an investor’s experience by reducing the emotional ups and downs that come with disruption.

Is an economic “hurricane” heading our way?

JPMorgan Chase CEO Jamie Dimon caused some investor angst when media outlets reported he was predicting an economic “hurricane” due to the war in Ukraine, rising inflation pressures, and interest rate hikes from the Federal Reserve. As investors, what should we make of his comments? It’s important to remember that the media is incentivized to create emotional responses.

In that interview, Jamie Dimon did say an economic “hurricane” was coming, but he also gave a wide range for its potential severity.  A few days before the interview, he painted a much less gloomy picture of the economy. To make things even more confusing for investors or JPMorgan Chase followers, a few well-known strategists at the firm are recommending to their institutional clients to buy the stock market dips! If there are conflicting outlooks at the same firm, how do we know who and what we should believe?

Investors should take economic forecasts with a grain of salt. Recessions are hard to predict and dependent on many factors that can change over time. Armies of PhDs and their economic models failed to predict the Global Financial Crisis (GFC) and other past market interruptions. Some individuals are always calling for a recession, regardless of the actual economic environment. Even if storms are on the horizon, the historical impact of major economic “hurricanes” on long-term investors has been muted.

What would an economic “hurricane” mean for my financial situation?

Like the answers to many questions, it depends! Over the past 25 years, investors faced many challenging events: the Asian contagion, two Russian defaults, the technology bubble, 9/11, a lost decade for U.S. stocks, the GFC, and a global pandemic. If investors knew all of these “hurricanes” were on the horizon, what would they have done? If they had moved to cash at any time, they probably would have received less than the 9.8% annualized return of the U.S. stock market during this 25-year period!

Any major drop in the stock market caused by an economic “hurricane” would probably be a wonderful opportunity to buy more stocks for long-term investors. Investors who bought in March 2009 could have made generational wealth! On the other hand, investors who invested at the top of the market in 2007, moved to cash during the drop and stayed on the sidelines probably destroyed generational wealth. If these individuals who invested at the top in 2007 had stayed invested from then to today, they would have made a lot of money. History has shown that reacting emotionally and moving to the sidelines would most likely be detrimental for investors.

Final Thoughts

What can investors do when faced with potential economic “hurricanes”? Following the tips below can materially enhance someone’s investment experience and financial outcomes.

Remember that recessions are normal and market declines are pretty frequent.

• Since 1951, the S&P 500 declined five percent or more about three times a year.
• S&P 500 declines of ten percent or more averaged about once a year and declines greater than 20% were less frequent but arose approximately once every six years. As of this writing, the S&P 500 is down 16.65% YTD.

Manage taxes and rebalance their investment portfolio to maintain their risk/return preference.

• Market volatility creates an opportune time to harvest losses (sell positions with losses), which creates a tax asset that can offset future gains.
• During periods of relative equity underperformance, investors may choose to sell other asset classes that have done well or use cash and buy into equities to keep their portfolio in line with their target asset allocation, aka “buy low and sell high.”

Diversify globally and across asset classes to help reduce risk while giving up little in gains.

• Investors can invest in international stocks and bonds, inflation-sensitive investments like precious metals and commodities, or uncorrelated assets such as reinsurance and catastrophe bonds.

Remaining focused on long-term objectives and focusing on what we can control can improve outcomes and help alleviate any stress.

Brandon Yee, CFA, CAIA – Senior Research Analyst
Brandon conducts investment due diligence for Versant Capital Management and designs and implements tools and processes to support the firm’s research. His biology and finance background helps him look at challenges from multiple angles, resulting in unique and well-rounded investment approaches and solutions.

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