What You Need to Know
- Volatility should remain high through 2022 as corporate profit growth slows and liquidity tightens, Suzuki says.
- Investors risk being poorly positioned for a new higher-interest, higher-inflation paradigm.
- Bear markets signal a change so investors should stay open about their portfolio choices.
Market volatility should persist for the rest of 2022, according to Dan Suzuki, investment committee chairman and deputy chief investment officer for Richard Bernstein Advisors, who also said investors risk poor positioning for a new paradigm of higher interest rates and inflation.
ThinkAdvisor recently asked Suzuki five questions via email related to volatility. Here are his responses.
1. What’s your view on where volatility is headed in Q3 & Q4?
We expect volatility to remain elevated in the back half of this year. Despite the heightened uncertainty, there is a relatively high degree of certainty around two things over the coming quarters: (1) Corporate profit growth will continue to slow and (2) liquidity will continue to tighten. That combination of factors has historically coincided with market volatility.
Additionally, we are in the midst of a deflating financial bubble, and bubbles do not correct overnight. It is typically a drawn-out process of ups and downs as investors cling to previous winners.
2. What are the greatest risks and opportunities for investors in this environment?
The biggest risk today is that investors are woefully positioned for a new paradigm of higher interest rates and higher inflation. Market concentration remains high in long-duration stocks, bonds and alternative investments, all of which are likely to face a prolonged period of disappointing returns if interest rates trend higher over the coming years.
As is typical following an extended bull market, investors remain positioned for past leadership to continue. Yet bear markets always signal a change in leadership. So the big long-term opportunity is in investments that are doubly cheap because of the sell-off in stocks and bonds and because they are in the overlooked areas of the market that have been overshadowed by the excitement around innovation and technology.
Rather than U.S. large-cap growth, we see bigger long-term opportunities in international markets, small caps and value.
3. What chance of a recession do you think there is today, and to what extent has the (equity) market already discounted a recession?