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Portfolio > Economy & Markets

Strategist Warns Investors Against Clinging to the Past

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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?

For markets, the more important questions are whether we’ll see a profits recession and how deep it will be. Profit recessions have a much closer tie to market performance than economic recessions. It seems very likely that we’ll see a profits recession within the next few quarters, and that would be a big red flag for risk assets.

As for an economic recession, personally, I think the chance of an eventual economic recession is also quite high given that global central banks are now aggressively tightening into a global slowdown, and I’m not seeing many proposals for fiscal stimulus to offset the monetary tightening.

But even if you take a recession as given, there’s still tremendous uncertainty about the timing and severity of the recession. As a result, I’m inclined to think that a potential recession may take longer than people expect to happen and be shallower than normal.

A lot of the sell-off in the stock market this year has probably had more to do with tightening liquidity than with the pricing in of an eventual recession. Only in recent weeks have you seen the stock declines broaden out in such a way that would suggest the pricing in of a significant economic slowdown. That’s why I suspect that a recession has yet to be priced into markets at this point. 

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

We don’t put out index targets. From the start, our caution has been more directed toward the parts of the market that are in a bubble. This would include stocks associated with secular growth, disruption and innovation that have benefited the most from the recent period of record liquidity.

These stocks make up such heavyweights in all of the major indices that getting the prerequisite washout to establish a trough would probably put significant additional downside pressure on the indices. Further downside risk could also come if growth significantly weakens from here, which would likely cause the weakness to extend beyond tech to all the cyclical sectors. 

5. What should advisors be telling clients at midyear?

First and foremost, don’t abandon your plans. Whether your plan targets a specific asset allocation or makes regular investment contributions, bear markets are absolutely not the time to stop. Too often, investors greatly impede their long-term wealth creation due to fear and paralysis during volatile markets. Bad markets can be godsends to your portfolio so long as you continue to invest.

Second, remember that bear markets always signal a change in leadership. That means it is incredibly important for investors to remain open-minded about positioning portfolios. Do not choose investments based on what has worked over the past decade for those investments are likely to underperform during the next cycle.