Should I Worry Now? Maybe. At Least Be Prepared.
I don’t remember who coined the phrase “Bunny Market,” one that continues to go up and down, to describe the volatile market we have experienced since the pandemic started. After the events of the last week, is the market going to bounce into a correction or worse? Markets and clients do not like uncertainty, and how the Russian invasion of Ukraine will play out is a big question mark.
I wish I could predict the future, but even though my crystal ball has been in the shop several times, it still remains cloudy. The best I can do is to gain insight from past instances and apply them to the current situation. Of course, that’s where the standard disclaimer, “Past performance is no guarantee of future results” applies.
History does leave clues—we just don’t know exactly which scenario to expect. Commentary from Kelly Bogdanova of RBC Wealth Management highlighted that there have been 18 post-
World War II events that, on average, have resulted in a 6.2% sell- off and were resolved rather quickly, generally within a month.
She does highlight that this is not always the case. “It’s notable that two deeper and longer-lasting corrections were associated with events that meaningfully disrupted energy markets, weighing on economic growth—a risk in this case. The instances when this occurred were in 1990 when Iraq invaded Kuwait and seized its oilfields, and back in 1973 during the Yom Kippur War and Arab oil embargo. The market declined about 16% in each of these cases.” In 1973, it took six years to recover, and in 1990 it was about four months.
So, what can we expect this time?
Steve Schifferes, in an article in the Economic Times, points out that this crisis “comes at a delicate time for the world economy, which was just beginning to recover from the ravages of COVID. Russia’s war could now have far-reaching economic consequences, as financial markets tumble and the price of oil soars.” He, too, harkens back to the 1973 Yom Kippur War in the Middle East and, while the economic landscape is currently different, there is still a concern that this incursion “could tip the world into stagflation, a combination of high inflation and low economic growth.”
The truth is that we are still in the early stages and the outcomes are murky. There are tried-and-true steps you can take whenever there are market downturns and corrections. Here are some things to consider:
- Cash flow. If it will be tight, look at decreasing discretionary spending, prioritizing obligations and reviewing your emergency fund.
- Retirement. Review options to make sure you are still comfortable with your decision and look for ways to conserve cash and reduce expenses in the next few years.
- Investments. Revisit overall investment philosophy and target allocations. Keep in mind your long-term view. If you have extra cash, consider making an investment when valuations are low.
- Long-term planning. If you have an annual gifting strategy, now might be the time to gift assets at lower valuations. If you are in a position to help family members in need of financial assistance, consider making intrafamilial loans, which can be made at lower rates and can act as an “advance” on an inheritance.
If you have a long-term strategy in place, chances are you won’t need to make changes to your plan. A solid long-term plan takes into consideration the impact of market fluctuations.
One of the reasons I believe in advanced planning is that it is easier to make decisions when not faced with a crisis. If this is just a blip in the market, take some time and make some concrete plans about what to do before we have another major disruption.