- If inflation peaks and earnings are strong heading into 2023, it could boost investor confidence.
- Recent market volatility has been an opportunity for investors and their advisors to revisit their goals and time horizons.
- It has also been a chance to take advantage of tax strategies to help minimize the effect of any losses.
The volatility that’s gripped the markets for weeks has prompted some investors to ask, “Is this the bottom?”
But waiting for that market low may prove elusive.
“There’s no ‘the’ bottom,” said Chris Hyzy, chief investment officer at Merrill and Bank of America Private Bank. “We are in the midst of a bottoming process.”
That may be resolved with time, Hyzy added.
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Additionally, two catalysts may help turn investor sentiment for the better.
The first is inflation peaking. “We expect that to happen in the next couple of months,” Hyzy said, and the other would be strong earnings heading into 2023.
“If those two things converge together, then investor psychology will improve in the next 12 months to 18 months,” Hyzy said.
Inflation data released Friday pointed to potentially slower price increases, helping to send stocks higher midday and position the Dow Jones Industrial Average to possibly break an eight-week losing streak.
One reason why this bout of volatility has concerned market analysts is that both stocks and bonds have seen higher than normal churn. Bond and stock volatility has not been so closely correlated since 1994, Hyzy noted.
“This is new for a variety of new investors, and this is a story that the more experienced investor did not want to see again,” Hyzy said.
Rebalancing opportunity
For investors and advisors, the current moment presents an opportunity to re-examine goals and objectives.
“If your time horizon is at least three years from now … the bottoming process that we expect to happen in the coming months is a summer-rebalancing opportunity,” Hyzy said.
Those investors with shorter time horizons should also revisit their goals.
“You have to make sure you review your risk profile and course-correct where you need to,” Hyzy said.
A balanced investment process should also include a broad diversification across asset classes, in addition to the alignment of goals and time horizons, according to Keith Glenfield, head of investment solutions at Merrill and Bank of America Private Bank.
Opportunistic moves
Higher market volatility also has presented an opportunity for advisors and their clients to take advantage of tax-loss harvesting, whereby certain securities are sold at a loss to offset capital gains tax on other securities sold.
The firm is providing those services through a suite of tax-management services it made available to the firm’s advisors last summer.
Once a client elects to enroll in the service provided through the firm’s fiduciary program, the advisors have the discretion and authority to act on their behalf, according to Glenfield.
Those clients’ advisors are then able to look for tax-loss harvesting opportunities as they arise, rather than waiting until year-end.
“If you did it at year-end, you don’t know where your portfolio or specific positions are going to be at that point,” Glenfield said.
“This allows you throughout the year to help take advantage of the peaks and the valleys,” he said.
Other features include tax-efficient rebalancing, quarterly loss harvesting and investment strategies that emphasize tax approaches.
The level of activity for the new offerings is increasing every week, according to Glenfield.
“We’re pleased with the client response,” he said.
