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Peter Mallouk

Portfolio > Economy & Markets

Peter Mallouk: This Time Really Is Different

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A complex set of factors are influencing this year’s volatile markets, creating a need for financial advisors to offer more education for concerned clients, according to Peter Mallouk, Creative Planning president and CEO.

He recently offered several insights for financial advisors and investors to consider in approaching the current environment.

It’s More Complicated This Time

“I think it’s a more complicated time than normal,” Mallouk said in an interview Tuesday, noting key differences between this year’s market downturn and the past four bear markets.

“These were four very scary bear markets but they all had one thing in common: They all had a single cause,” Mallouk said, citing the tech bubble, 9/11, the 2008-09 financial crisis and the 2020 coronavirus pandemic.

In contrast, a string of developments are rocking financial markets this year, including an overbought stock market, Russia’s invasion of Ukraine, supply chain disruption, high inflation, Federal Reserve rate hikes and rising COVID cases leading to new lockdowns in key markets, he noted.

“There’s so much information, it’s not an easy narrative to explain or understand,” Mallouk said. “There’s a lot of complexity and a lot of uncertainty and the market is behaving accordingly.”

Fed vs. Investors

There’s another difference this time. 

In the past four bear markets, the Federal Reserve “was on the investor’s side” and pumping money into the system, Mallouk said. Now, given high inflation and low unemployment, “this is the first bear market in a long time when the Fed is on the opposite side” and wants the market to cool down, he added.

Focus on Clients’ Needs

This market complexity may require more education for clients. “Different clients bring different concerns,” Mallouk said, adding that some may think there’s only one issue driving the market.

His advice for advisors? “They need to get back to focusing on the clients’ needs. What do the clients need and when do they need it?”

That means owning the kind of assets that don’t require investors to worry about what happens to energy prices in the next six months or with the pandemic or the supply chain in the next year, Mallouk said.

“Just own things that over certain periods of time tend to do well and make sure your clients understand that that’s how you’re making your decisions,” he said.

Retirement Can Last a Long Time

How clients position their portfolios, of course, depends partly on their stage in life.

“If you’re 30 years old, what you want is for this turmoil to go on longer so you can accumulate while this market is weak,” Mallouk said.

The picture looks different for retirees or those nearing retirement.

“They are in a precarious place because they really need to preserve the purchasing power of their wealth,” which means holding on to asset classes that are susceptible to market volatility, Mallouk said. “It can be a scary time” for those entering retirement.

“Make sure you’re covered for the short run and own the riskier assets for the long run,” he said, noting that even those entering retirement have long investing horizons.

‘Garbage’ Assets Are Not Coming Back

Mallouk wrote in a recent column that many high-flying investments from recent years have been especially hard hit in 2022, far more so than the S&P 500 index. The S&P 500 is down about 14% year to date — not a particularly unusual swing.

“Many investors think you can buy and hold your way through markets like this, but if you are holding garbage, it isn’t coming back,” he said Tuesday. “This includes most SPACs, many NFTs, cryptocurrencies (and) high-flying small call cap stocks with no expected earnings to be seen.”

It’s Temporary

Another different element this time is that prices for bonds, usually considered safe havens, have been hit as the Fed has raised interest rates, so assets may not behave the way people expect, Mallouk noted.

“It is going to take an understanding that there are going to be times when everything is up or down. It’s temporary,” and investors shouldn’t make portfolio mistakes because of it, he said. Mallouk doesn’t expect this uncertainty to continue for long.

“A few quarters at most, 18 months or so of this turmoil,” Mallouk said. “Eventually the Fed’s going to get the economy calibrated to where they want.” 

Financial advisors and investors need to look at more than one variable, although any Fed decision to accelerate or decelerate rate hikes will have an impact on markets, he said.

“I pay most attention to what the Fed’s going to do,” Mallouk said.