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Market Insights: Volatility, Bonds, and What to Do About Them

By Ankur Patel

All in all, global investing markets remained volatile in April. The S&P 500 was down 8.8% for the month (down 13% for the year), and the tech-stock-heavy Nasdaq was down 13% for the month (down 21% for the year). It was the S&P’s worst month since 2020, and the Nasdaq’s worst since 2008.

Bonds struggled as well, which is historically unusual (more on that in a second). The yield on 10-year Treasurys ended the month at 2.88%, up from 1.5% at the start of the year. (Remember: bond yields rise as prices fall.) That pushed the Bloomberg Agg (short for “Bloomberg Aggregate Bond Index,” one benchmark that tracks the US bond market) down by 10% so far this year.

So what’s going on — with stocks and with bonds? Here’s a breakdown, plus what we generally do and don’t recommend doing as a result.

A quick recap of what’s been driving this year’s volatility

Investors face no shortage of reasons to be nervous right now. Inflation hasn’t lost steam yet, and the war in Ukraine, which is driving higher energy and food prices, is only adding pressure. Supply chain issues, which were expected to have abated by now, are also threatening to make inflation worse — the pandemic is still severe in China, and strict lockdowns are affecting multiple cities there.

That leads us to the Federal Reserve (aka the Fed). After all, controlling inflation is one of their two main objectives, which is why they raised interest rates back in March (a move that has pushed mortgage rates above 5%). But investors are concerned that it wasn’t enough, and that the Fed might take even more aggressive action very soon — which, if it slows things down too quickly, may push the economy into a recession.

Then there’s the fact that historically, stocks and bonds have tended to move in relatively opposite directions — when stocks have done poorly, investors have rushed to bonds instead, so bonds have often done better. Clearly, that’s not what’s happening now — largely because of what’s going on with interest rates and inflation.

And one more thing not making all this any easier: The reported US GDP growth was not only lower than expected, but also down for Q1 of this year. (A recession is defined as two quarters of negative GDP growth. So we’re not technically there yet, but it can still feel like one.)

But the news isn’t all bad. For instance, that lower Q1 GDP report also showed growth in consumer and business spending, and the domestic labor market remains extremely strong. Plus, despite volatility, S&P companies’ reported earnings for Q1 do continue to trend positively.

This is normal: In investing, there are always factors that drive fear and factors that drive optimism.

Still, this continued volatility is beginning to wear on investors' psyches. “Bearish” sentiment (a gauge of how negatively investors feel about the market) has reached record highs — similar to levels seen back during the 2008 financial crisis.

Here at Ellevest, we’re starting to hear some questions about whether you should sell investments or wait to invest until things get better. And even if you haven’t asked us, we’re guessing the thought has probably crossed your mind. We get it. During times like this, it can be very tempting to retreat to the safety of cash.

Here’s the thing: Timing the market doesn’t work

Don’t let your anxieties get the best of you. Market timing — attempting to predict what will happen and act accordingly — doesn’t work. It’s a losing endeavor over time. In order to do it successfully, not only would you need to know when to sell your investments — you’d also need to know when to buy again. Research consistently shows that even professional money managers can’t often get this right (and over long periods of time tend to do much worse).

Let’s zoom out for a second and look at the past 30 years’ annual returns for the S&P 500. The orange dots in the chart below represent the max drawdown (aka the worst dip) for each year, while the green bars represent the market’s overall return by the end of that year. As you can see, it’s not uncommon for markets to end positive even though they had mid-year declines. And while the past isn’t a guarantee of what will happen in the future, things seem to be right in line with historical norms at the moment.

Total Returns and Pullbacks

Detriments to your returns

Next, let’s take a look at what happens when people try to time the market. The chart below tracks the performance of a $1,000 investment in the S&P 500 over the last 25 years. If you’d held it the entire time, you would have seen a nearly 400% return.

On the other hand, if you’d tried to time the market, you very well could have missed out on some of those positive returns while you waited. Even if you only missed the best ten days, you would have cut your returns by more than half. And historically, these best days have often happened following the worst periods of volatility.

Staying Invested: Missing the Best Days

Holding cash

Maybe you’re not here to try to “time” anything — you just want to stop and wait for things to look up again. That’s still a form of market timing, and it can hurt you as well.

The chart below shows what would have happened to a hypothetical investor* who sold their stake in a global equity portfolio during the depths of the financial crisis, moving to cash for one year instead, to “let things settle down.”. In a little over a decade, their $100,000 investment could have turned into $553,000 — but instead only amounted to $323,000.

The Value of Staying Invested

Long story short: keep calm and invest on.

OK, but what about bonds?

It can be scary to see bonds and stocks move in the same direction. After all, many people have bonds in their portfolios in part to provide diversification and help offset stock market risks. But while this kind of risk-hedging often works, historically speaking, there can be times when both move in the same direction — although it tends to be short lived (see: the “taper tantrum” of 2013). Historically, over longer time periods, the more typical correlation has resumed.

If you currently invest in individual bonds, no need to stop. At Ellevest Private Wealth, we encourage investing in bonds when you have the means, especially during periods of volatility like this. Even if your bonds show a negative return right now, remember you’ll only realize a loss if you sell the bond today. If you can hold your bonds until maturity, there’s a good chance you’ll get your money back (as that’s how bonds are designed to work).

If you invest in bond funds (ETFs, mutual funds, etc), no need to stop there, either. Bond funds can be great for diversification, as they allow you to hold pieces of thousands of underlying bonds (including in the higher risk/higher return areas of the market, like high-yield bonds). The funds, too, may be showing a negative return right now, but again, you only lose money if you sell them today. (And under the hood, even if those fund managers were to sell the fund’s underlying bonds at a loss today, they may reinvest the proceeds at today’s higher rates. This may help generate higher returns going forward and offset any negative realized returns today.)

Here’s what we typically recommend instead

So, should you just do nothing?

Well, no. First things first, during times like this, it's always helpful to take a step back and review your goals. Is this money for a long-term goal, like retirement? Maybe it’s even more than ten years down the road. If so, all the better. Reminding yourself of that can help you refocus your long-term perspective, and keep your anxieties in check.

If you’re using Ellevest’s online investing platform

You know what we’re going to say: Stay the course and focus on the long term. Keep investing, a bit out of every paycheck, no matter what’s going on in the markets. (Besides, Ellevest’s forecasts take periods of volatility like this into this account already.) And if you’re not investing yet, consider starting now.

If you're working with a financial advisor

If you’re holding cash, reach out to your financial advisor to make a plan to get it invested according to your goals and values. Equity valuations are more attractive (or, as they say, “stocks are on sale”). And on the fixed income side of things, interest rates are higher than they were before. Your advisor should also talk to you about private alternatives and the role they can potentially play in your portfolio during times like this.

On the other hand, if you’re already invested, this may be a great time to consider strategies like tax-loss harvesting. Aiming to make your portfolio as tax efficient as possible — something we’ve worked with clients on a lot lately — can make a meaningful difference in your after-tax returns over the long run.** Plus, if you have a concentrated position and are looking to diversify, now may be a great time as well. Ensuring you have a diversified portfolio is one of the best ways to buffer against market volatility. You could also use this opportunity to shift into an impact portfolio.

In any case, we hope we’ve shed some light on why we’re such strong believers in creating a plan and sticking to it for the long term — even when times (and investing anxieties) get tough.

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

For illustrative purposes only. This is a hypothetical portfolio using index-based data and doesn’t represent any Ellevest portfolio or client. It’s by no means individually tailored advice. Past performance is not a guarantee of future results.

FYI, there are risks and limitations associated with tax-loss harvesting strategies. Any reduction in taxes would depend on the individual investor’s tax situation.


Disclosures

© 2022 Ellevest, Inc. All Rights Reserved.

Ellevest, Inc. is an SEC-registered Investment Adviser. The information provided is current as of the date provided and is subject to change without notice. Certain information was obtained from third party sources which we believe to be reliable but are 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. Past performance is not a guarantee of future results.

No chart or graph or presentation should be the sole basis for considering an investment.

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.

All opinions and views expressed by Ellevest are current as of the date of this writing, for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

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.

The practice of investing a fixed dollar amount on a regular basis does not ensure a profit and does not protect against loss in declining markets. It involves continuous investing regardless of fluctuating price levels. Investors should consider their ability to continue investing through periods of fluctuating market conditions.

Ankur Patel

Ankur is a CFA® charterholder with more than 15 years of experience working in investment and wealth management. As Ellevest's Senior Portfolio Manager, Ankur partners with our financial advisors to build and implement portfolios for our private wealth clients.