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Christine Benz

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Morningstar's Benz: 2 Risky Moves Investors Should Avoid Right Now

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Volatile markets make for uncertain and potentially scary times for investors. Via email, we talked to Christine Benz, Morningstar’s director of personal finance, for her thoughts on five questions related to market conditions for the rest of 2022.

Going all-in on one possible economic scenario or assuming the worst is over in stocks and bonds would be risky for investors now, she says, warning, “This is not the time for dramatic, either-or gestures.”

Here are Benz’s responses to ThinkAdvisor’s questions about market volatility:

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

Christine Benz: I don’t know, but there are a lot of unpredictable variables swirling around that could contribute to excess volatility in the second half. If the Fed’s interest-rate increases don’t do the job of curtailing inflation, we could have additional inflationary shocks which would likely be followed by further interest-rate increases.

And if the Fed overcorrects, the U.S. economy could tip into recession. Add in the midterms and the war in Ukraine and the stage is set for further volatility. 

On the plus side, equity valuations are now a lot more reasonable, which makes stocks less vulnerable to some of these exogenous shocks. And interest rates have already gone up quite a bit; higher bond yields help offset some of the principal-related volatility that bonds have experienced thus far this year.

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

The greatest risk is casting your lot with a specific scenario that may or may not come to fruition. This is not the time for dramatic, either-or gestures. For example, if you position your portfolio for further inflation and interest-rate increases, purging it of bonds and leaning into economically sensitive stocks, your portfolio is then poorly positioned for a recessionary environment.

Another risk is assuming that the worst is over for stocks and/or bonds and backing up the truck for them. While our analysts’ price/fair values … point to stocks as undervalued now, there’s no guarantee they won’t get cheaper before it’s all over. Investors should stick with their asset allocation plans and dollar-cost average into stocks to help protect themselves against a market environment that’s apt to continue to be volatile.

Regarding opportunities, a couple of the best ones relate to taxes — specifically, tax-loss selling and IRA conversions.

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

I don’t know! As I noted in my response to question 1, the market appears to be factoring in recession as a possibility — yields have dropped a bit and the yield curve is pretty flat.

4. Do you think the markets are oversold, and where do you see the major indexes ending 2022?

 (See response to question 2.) Our analysts’ bottom-up research does suggest that stocks in our global coverage universe are trading at a discount to fair value. That discount is currently about 16%.

5. What should advisors be telling clients at midyear?

As with any stressful, volatile environment, it can be helpful to remind clients what’s out of control and the actions that are in their hands.

They can’t control the direction of the economy, interest rates, or inflation, but they can control their savings rates — or spending rates if they’re retired — their asset allocations, their specific investment selections, their investment-related costs, and taxes. And they can also control their own behavior, recognizing that knee jerk moves in response to market activity are rarely helpful.


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