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August 22, 2022 – From 1979 through 2019, the S&P 500 Index had an average annual return of 12%, prompting many investors to operate with that rate in mind for any given year.  However, looking closer, the Index only returned between 9% and 12% three times during this time period;[1] volatility is much easier to tolerate when you can see it coming.

Historically, bear markets tend to be short lived. Since WWII, the average length of a bear market has been about 11.6 months. In comparison, bull markets lasted on average 2.7 years. Additionally, stocks lose approximately 33% on average in a bear market, a stark contrast to the roughly 114% average gain seen during bull markets.

It’s hard to time the markets, especially when half of the S&P 500 Index’s strongest days over the last 20 years occurred during a bear market. Another 34% of the market’s best days took place amid the first two months of a bull market, well before it was clear a boom was underway. [2] In summary, while bear markets can be painful, markets have generally remained positive overall. Bear markets have comprised about 20.6 years of the last 92 years; in other words, stocks have been on the rise 78% of the time within this period.[3]

However, investing carries the inherent risk of exposing our psychological foibles and the emotional impediments that can get in the way of rational decision-making.  Investors tend to blink at the worst moments, selling low and buying high.  According to Cerulli Associates, recency bias retained its position as the most widely observed client bias in recent years. Likewise, confirmation bias and framing each grew to the second and third positions respectively in a 2021 study of financial advisors’ observations of client behavior.

The next two years will likely see investment markets continue to be dominated by “top down” macro conditions, complicated by behavioral biases, as we grapple with an elevated risk of recessiondue to stubbornly high inflation, supply disruption, geopolitical challenges, and hawkish monetary policy meant to combat inflation at the expense of growth and employment.  Key risks to global markets include central bank missteps, lingering inflation, commodity impact of Russia-Ukraine war, sharp slowdown in economic data, and China balancing real estate headwinds amid COVID-related lockdowns. In other words, the investment environment is ripe for human foibles.

At Robertson Stephens, we believe the best way to approach a client’s portfolio and asset allocation is by empowering them to withstand any market turmoil and remain consistent with their financial plan. High correlation between stocks and bonds can happen when central banks aggressively tighten policy rates, and both have seen substantial drawdowns this year. We believe portfolios need to be constructed with flexibility to address three potential macro scenarios — stagflation, recession, and a growth surprise – each is dynamic and subject to rapid change.  While equity valuations are more reasonable after recent declines, we remain cautious on the earnings growth outlook and inflationary impacts on margins.  Within equities, we’ve allocated to value, dividend payers, quality growth, and alternative strategies. Within fixed income, we remain underweight bonds and modestly overweight cash in addition to incorporating private distressed credit managers. Furthermore, we are taking advantage of higher yields by selectively adding duration mitigating against heightened global market risks and economic slowdown.  We’ve also continued to add to real assets for the sake of providing a hedge should inflationary pressures persist longer or settle higher than expected. 

It’s only natural for investors’ biases to seep into their calculations. However, amid volatile times like these, it’s essential to temper these inclinations with a historic perspective and sound outlook grounded in a rigorous, process-driven portfolio construction framework.

Stuart Katz is Chief Investment Officer of Robertson Stephens, a wealth management firm striving to provide comprehensive and innovative investment solutions and wealth strategies to clients through an intelligent digital platform.

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[1] Source Morningstar

[2] Source Ned Davis Research

[3] Past performance does not guarantee future returns.

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