Market Watchers Urge Calm as Volatility Spikes

Brad McMillan, chief investment officer (CIO) at Commonwealth Financial Network, frequently provides PLANSPONSOR with market commentary on the heels of a big day in the stock markets.

McMillan did so this week after the Dow surrendered 943.24 points, or 3.43%, during trading on Wednesday. That day, the S&P 500 lost 119.65 points (3.53%), while the Russell 2000 closed 47.21 points (2.98%) lower, and the Wilshire 5000 plunged 1,195.64 points (3.41%).

Despite the big one-day drop, McMillan says he is not overly worried.

“As I have been saying, markets have been baking in a lot of optimism, assuming that the pandemic was under control, that the economy was healing and that things would be back to something approaching normal in 2021—and maybe not just in late 2021, but earlier,” he says. “That optimism drove prices up to all-time highs, which became something of a virtuous cycle. When everything is awesome and stock prices are rising, well, prices should be high. Those assumptions were always optimistic, though.”

This week has delivered a painful but necessary “reality based” repricing, McMillan suggests.

“Markets should reflect the most likely future path, not the most optimistic, and that is where we are headed,” he adds. “In that sense, the recent pullback—even if it gets worse—is a good thing.”

By late in the day on Thursday, the equity market indices had regained between 1% and 2%, aided by what can only be described as an incredible U.S. gross domestic product (GDP) report that shows 33.1% growth for the third quarter of 2020. Of course, this record pace of GDP growth is largely a reflection of the record pace of losses experienced during the first half of 2020. Still, taking in the whole picture, McMillan says, things are better than they seem, at least from a macroeconomic perspective.

“That the medical risks are real and rising is true enough, but it is also true that we know what to do to bring the virus under control,” McMillan says. “When we start doing it again—which, admittedly, we are not doing at the moment—we will see the infection rate drop again, just as we did in the first two waves. The volatility reflects the risks, but those risks will pass. When they do, the foundations of the economy and the markets will still remain much healthier than the headlines suggest.”

McMillan says he is glad to see earnings are coming in “much better than expected,” and he says he is still hopeful that those who remain unemployed will get more federal income support after the election.

Fresh survey data shared by Wealthramp, a Securities and Exchange Commission (SEC) registered referral service that connects investors and fee-only financial advisers, adds some context to McMillan’s analysis. The firm says eight out of 10 advisers in its referral network are feeling confident in the plans they put in place with clients and are not making major adjustments to portfolios. Furthermore, 42% say their clients are “not very nervous” or “not at all nervous” about their portfolios at this moment, despite the pandemic and the upcoming election. Only 1.5% of advisers say their clients are “extremely nervous” and want to make immediate changes to their portfolios.

Though the data suggests investors are remaining somewhat calm, many are still paying attention to the ongoing market jitters. According to Wealthramp, investors’ greatest concern is knowing how to hedge to protect against downside risk. In addition, more than a quarter of advisers report having or maintaining enough cash cushion as the next most important priority among clients—which is consistent with findings reported in April of this year. The data suggests women are more concerned about having or maintaining enough cash cushion compared with the overall client base (44% versus 27%).