When discipline matters most

Stock markets have been more turbulent in the last few weeks than we’ve seen in a while. The VIX index, which measures stock market volatility, has risen to levels last seen in late 2020, as the world was adjusting to the COVID reality.

This time around, the fears are concentrated around two main themes:

1. Investors are starting to wonder if the hype around Artificial Intelligence (AI) might have been overblown. Expectations for the increase in profits of certain companies, based on assumed sales of or productivity gains from AI systems, are not being met.
2. Stock markets are concerned that the US economy might be getting weaker faster than the US Fed intended. Job creation in the US was below analysts’ expectations for the month of July, leading to concerns that the US Federal Reserve left interest rates high for too long. Concerns that the US may go into a recession are increased as a result.

We cannot predict if this was a short dip, or if it might become something more extensive, but there are a few fundamental elements of our investment philosophy that are always important to remember:

1. Our tilt to value and small cap stocks means that we hold less of the AI speculation-fueled stocks that are getting hit harder than the rest of the market.
2. All portfolios hold enough bonds to cover several years worth of each client’s needs to ensure that we don’t have to sell stocks when they’re down.

To the second point above, it is also worth pointing out that interest rates have come down amidst the current fears, increasing the price of the bonds in client portfolios. To be clear, the increase in bond prices wasn’t sufficient to offset the downturn in stocks, but it’s nice to know that the safety cushion in all portfolios is doing its job in stressful times.

The beginning of 2024 has been very good for portfolios, with the returns between 7% and 15% to the end of July, depending on the allocation. The market volatility of the last couple of weeks may have taken a bit of the shine off those strong numbers, but portfolios are still up quite nicely since the start of the year.

We know we can’t predict what will happen, but we can certainly plan for what might, so we build portfolios for good times and bad and the last two weeks remind us of the importance of that discipline.