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LPL executive Burt White

Portfolio > Economy & Markets

Burt White: ‘Volatility Is a Fee Worth Paying’

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Although market volatility continues, there is likely some upside down the road for investors who are patient and stick with their plans, according to Carson Group’s Burt White.

White, LPL Financial’s former chief investment officer, joined Carson Group in April as its chief strategy officer and a managing partner.

Via email, we asked White a few questions about the state of the current market and where he thinks it’s headed.

1. What’s your view on where volatility is headed in Q3 and Q4 and why? 

Burt White: Volatility likely will remain high due to the recession we are already in. No, we are certainly not in an economic recession like some think, but rather a confidence recession, where the market and investors feel a lack of clarity on the course of the Fed’s actions and the general inability to quickly get inflationary pressures under control.

This uncertainty is weight on the markets and like a wet blanket draped over hopes for a recovery.

That said, stocks in a non-recessionary bear market have historically been very attractive entry points. In fact, if history is any guide, once a bear market begins, recoveries are often closer than we anticipate.

The last 10 times since WWII that the market crossed into bear market territory, only three times did stocks move further lower a year later and each of these were associated with a major recession — something that is not where we are today.

The other seven times, markets recovered significantly following the bear market crossover. Importantly, those three previous non-recessionary bear markets, similar to the economic conditions we are currently experiencing, all posted one-year gains over 22% and averaged 25% advances in aggregate.

While there are still many things to still unfold for the market and the economy, we do not anticipate a recession on the near-term horizon and thus view these historic trends to be the most likely paths for market conditions to follow.

2. What are the greatest risks and opportunities for investors in this environment and why?

The greatest market risk remains a policy mistake by the Fed. Being data dependent means the Fed needs to keep their head on a swivel and be prepared to swiftly battle inflationary pressures until it’s time to do a quick 180 and prop up markets for landing too hardly into recession-land.

The Fed can’t fix inflationary pressures along with their relatively weak toolbox of interest rate hikes and rhetoric. The Fed just needs to shave off some demand to buy the time needed for supply chains to recover and resolve this inflationary bout. The Fed needs to view itself as a part of the solution, not the savior. Anything otherwise and the Fed drives the economy into a recession.

For investors, the greatest risk is abandoning their plan. Emotion is ignited by pain, fear, and suddenness, which makes market volatility hard to navigate. It is easy to identify the challenges that sit right before us but the case for how things will improve is often harder and more nuanced.

History has proven that challenges faced by the market are managed, mitigated, or innovated away with a longer-term vantage. Today’s challenges are no different. The reality is that markets are built to recover, which is why remaining steadfast to a long-term mindset and following a thoughtful investment plan is the key to a solid financial future.

The old investment adage of cheap sunglasses is the story to tell in times like these. You see, now is very likely not the right time to be seeking out the market’s version of an umbrella. The storm has already come and everyone is already drenched. Plus, umbrellas are super expensive during downpours, and so are defensive names in the market.

But on the shelves, if we take a look over the horizon, are marked down, cheap sunglasses — just waiting for the break in the weather. Investors should be maintaining adherence to their long-term plan and use thunderstorms to find sunglasses on the cheap.

3. What chance of a recession do you think there is today and why, and to what extent has the (equity) market already discounted a recession? 

Recession risk has risen to approximately a 1 in 4 odds but is not our base case for the next 18 months. We believe that the Fed can achieve the elusive “soft landing,” especially given the attractive balance sheet positions of both households and businesses, the overall health of the banking system, the best labor market in a generation, and the continued relatively strong spending by consumers.

When trying to assess the likely downside of a market, one of the key questions to figure out is whether we are in a recession or not. While this current market volatility is the eleventh bear market since 1950, it’s only the fourth to occur outside of a recession.

This non-recessionary characteristic is a vital factor, as these versions of bear-market periods are usually shallower and lead to a swifter recovery than the majority of declines that occur during recessionary times.

For example, bear markets that occur outside of recessions average a 28% decline versus the 39% average decline during recessions. With this current stock market volatility already pricing in the majority of the typical non-recessionary bear decline, cautious optimism remains that the market is approaching a likely bottoming level.

4. Do you think the markets are oversold, and where do you see the major indexes ending 2022 (Dow, S&P, Nasdaq) and why?

From a technical analysis perspective, it’s hard to say that stocks are still oversold given the sharp bounce back over the last week. But they certainly have characteristics of presenting attractive long-term appreciation opportunities.

For example, just a few trading days ago (June 17), only 1 in 50 stocks were above its 50-day moving average but that has improved now to 1 in 5. But that means that 80% of names still are at deep discounts and offer potential for long-term, patient investors.

We see the market posting a second-half rally, like it does in most midterm election years. In fact, over the four year presidential cycle going back to 1950, the fourth quarter of the midterm election year, which is this year, has kicked off historically the best period for stock performance.

Things are gearing up for volatility through the summer and a potential second-half rally that could propel stocks to re-trace most of the 2022 losses by year-end.

5. What should advisors be telling clients at midyear?

Just remember that the market, like most things in life, is more fragile in the short run than we would ever wish, but much more resilient over the intermediate/long run than we give it credit for.

Every single correction, bear market, pullback, drawdown, and recession in the history of the stock market was fully recovered. Need some evidence? All-time highs are just months behind us from the start of the year. This correction also will be fully recovered, just like its previous friends.

The reality is that markets are built to recover from bouts of volatility and, despite periods of concern, stocks have risen in 34 of the last 40 calendar years.

Volatility is what grants markets its return and opportunity. Markets generate wealth over time but it’s the uncertainty and volatility that grant it this upside — essentially the reward for the volatility fee.

In fact, 2021’s nearly 30% advance by stocks would never been possible without the volatility that happens in years like 2022. Or, as Morgan Housel states it, everything nice has a price. Volatility is a fee worth paying.

(Pictured: Burt White; Image: Twitter)


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