Rebalancing Market Volatility

Over the course of the last four days, we’ve seen volatility that the markets haven’t experienced since 2011. All of us at Windward Wealth Strategies have been in the financial service business long enough to have experienced numerous business cycles, and this late-stage bull market volatility is not atypical.

As a wealth management firm, we are always strategizing about how best to protect principal on the downside while providing an investment return that exceeds the rate of inflation and taxes over a full market cycle. Going into 2018, our expectation was that with the passage of the tax bill and a strong economy, we’re well positioned to continue the economic recovery that started in 2009. Unemployment stands at 4.1 percent nationally (the lowest since 2000), and the average pay rose by more than 3 percent in at least half of U.S. states in 2017.

It’s important to remember that the equities markets don’t always reflect current economic conditions, but there is certainly a correlation tied to anticipated future market conditions and corporate earnings. What we’ve seen recently is that strong job growth, wage growth and increasing interest rates for 10-year bonds raises concern about future inflation. The inflation rate hasn’t exceeded 2 percent for some time, but the Federal Reserve in fulfillment of one of their mandates, is likely to raise the short-term fed funds rate at least a couple times in 2018. Assuming the rate for a 10-year Treasury bond reaches and stays above 3 percent, suddenly bonds become more attractive and risk assets less so.

In accordance with each investment policy statement, we’ve positioned client portfolios to have short-term maturity bond exposure (including in some cases, non-correlating hard assets) to provide an “airbag” for market corrections. The volatility we’ve seen is not likely a prelude to a steep correction in the equities market. In similar times in the past, these events have provided a healthy breather for investors, not a reason to make any drastic changes to one’s asset allocation. As a wealth management firm, Windward Wealth Strategies has taken advantage of selling equities into strength during 2017, mindful of capital gains, and we’ll continue to rebalance each portfolio according to the investment policy statement.

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Windward Wealth Strategies Northeast Wisconsin Office 2370 State Road 44 STE A Oshkosh, WI 54904

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