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Monthly Market Insights: Recession-ish

By Sylvia Kwan

After the worst first half of a year since 1970, July brought a welcome reprieve in the markets. The S&P 500 rose 9.1%, the Dow 6.7%, and the NASDAQ 12% for the best month of gains since 2020. But while these gains feel optimistic, the economic backdrop is still very much mixed, which makes them look more like a bear market rally than the start of sunny skies ahead.

A closer look at that mixed economic backdrop

The Federal Reserve raised interest rates by another 0.75% on July 27, which was pretty much in line with expectations. Interest rate increases are generally bad news for the stock markets, but this time, markets rose thanks to Fed Chairman Powell’s remarks that future increases might be smaller. US gross domestic product (GDP), a measure of the economy’s output, shrank by almost 1% in the second quarter. That was its second consecutive quarter of contractions, prompting some to declare that the economy is now in a recession. (Two straight quarters of declining GDP is a common definition of a recession.) However, US officials aren’t ready to make that leap, since most recessions are also characterized by high unemployment — and the latest data on the US labor market is showing strong job growth and an unemployment rate near pre-pandemic lows.

High inflation and interest rates also continue to weigh on the economy, slowing consumer spending (which, after all, is the point of raising rates). Both Walmart and Procter & Gamble warned that higher prices are keeping consumers from spending, which is slowing sales growth and crimping profits. Meta (Facebook’s parent company) reported its first ever decline in revenue, thanks to slowing demand for digital advertising. On the positive side, Apple posted better-than-expected iPhone sales, and other retailers like Colgate-Palmolive and Unilever raised their sales forecasts for this year. (For Unilever, that higher forecast came despite announcing they will stop offering the ice cream treat Choco Taco — very sad news indeed for all ice cream lovers.)

International economies are also showing mixed results. China grew 0.4% in the second quarter, its slowest growth rate since the pandemic, due to strict COVID lockdown policies that are driving down consumer and business spending. During the same period, European economies grew 4%, significantly exceeding expectations.

When nothing is straightforward, don’t navigate alone

Amidst such conflicting signals (and market volatility), staying focused on the long term is easier said than done. Lots of existing research shows that emotions can be an investor’s worst enemy. It’s nearly impossible to ignore our feelings — of fear and anxiety when markets are down, of excitement and exuberance when everything is going up. That makes it so easy to forget our fear and abandon careful risk management when markets are strong, and so very hard to stay the course in poor markets when everything feels risky and your investments are down.

Which is why it’s times like now — challenging and uncertain markets — that having a financial advisor can be most valuable. Having someone to help guide you away from poor investment decisions in both the best and worst of times can not only feel comforting, but also enhance your portfolio returns as well — up to 2% annually, according to a report by Vanguard. Plus, having someone to monitor and manage your portfolio by regularly rebalancing and aiming to minimize fees and taxes (whether you’re using an online platform like Ellevest's or advanced techniques with a financial advisor, like active tax loss harvesting) can add another 1% annually or more, making the total value of having an advisor-managed portfolio (vs taking a DIY approach) about 3% annually, based on Vanguard’s research.

Another recent study by Russell Investments shows that advisors who provide holistic advice beyond investment management, like we do at Ellevest Private Wealth, can add even more value — as much as 5.2% annually. Couple that with access to private investments designed to perform in challenging markets — whether it’s high inflation, rising rates, and / or slower economic growth — and you’re looking at lower overall portfolio risk, potentially enhanced returns, and even more help staying the course.

Whether it’s 2%, 3% or 5%, what it really boils down to is whether you can afford not to have a financial advisor by your side, especially during challenging markets.

Holding too much cash, not rebalancing regularly, ignoring the tax consequences of moving your money around, and / or making rash decisions based on anxiety or euphoria can be costly for your portfolio. Markets change and life happens. A financial partner can guide you along the journey, monitor your investments, and help you take the actions you may not have the time, stomach, or energy for. And all those things need to keep happening as markets, tax laws, and regulations change, even if your financial situation hasn’t.

The bottom line?

It goes without saying that plenty of uncertainty lies ahead. If you happen to have the interest, discipline, and emotional fortitude, DIYing your own portfolio can save you money on advisory fees. But the value of working with an advisor in the most challenging market environments — whether it’s with Ellevest or elsewhere — has the potential to improve your portfolio’s returns and offset those costs and more.

And having someone you trust take on all the work and worry? Priceless.

Click here to contact an Ellevest financial advisor in your area.


Disclosures

© 2022 Ellevest, Inc. All Rights Reserved.

Information was obtained from third-party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Investing entails risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Sylvia Kwan

Dr. Sylvia Kwan is the Chief Investment Officer of Ellevest. She researches and oversees Ellevest portfolios and develops the algorithms behind Ellevest’s investment recommendations.