Normalizing of interest rates now impacting markets greater than geopolitical upheaval
While geopolitical concerns cause more volatility across asset classes, Vanguard’s historic research shows that bear markets always recover, so advisors need to help their clients weather them.
“Geopolitical uncertainty causes market volatility, as it did recently, across asset classes and it does impact investment portfolios,” Bilal Hasanjee, Vanguard Canada’s senior investment strategist, told Wealth Professional.
“Upon examining various geopolitical events over the past 60 years, we find that while equity markets may react negatively to the initial news, the geopolitical sell-offs are typically short-lived and returns over the following 12-month period are largely in line with long-term averages.”
While Russia’s war on Ukraine impacted the current markets, he noted that the macroeconomic policies, normalizing interest rates, and reverting back on quantitative easing did, too.
“That is having a larger impact on financial markets now than the geopolitical event associated with the Russia-Ukraine situation,” he said.
Hasanjee noted there was an unprecedented bounceback, especially in the equity markets, during COVID because of the central banks’ unprecedented monetary policy and government’s fiscal support. While valuations stretched over 18 months, there was some concern around that before the war and China’s recent lockdown, which sparked concerns about slower growth. Now the central banks are increasing interest rates and ending quantitative easing, which has put pressure on both equity and bond prices.
Vanguard’s recommending that advisors continue to stay the course in these unprecedented times.
“Put a financial plan in place. Establish goals, minimize costs, and have the right asset allocation, using low-cost funds,” he said. “If advisors do all that, over a long period of time, all these factors will essentially fade off. If you look at history, they have faded before. We did study after study that proved that,” he said, noting their studies show stocks always come back strong.
“Our research says that we should always plan for the long-term and stick to our plans,” said Hasanjee, adding that’s especially true now. “Our fair value projections reveal a global equity market that has gone through a significant price correction since November 2021 and is likely to produce better returns than previously estimated over the next ten years, which is the minimum we look at.”
“Despite these downturns, global stock prices have continued to new highs showing the value of staying invested, even during periods of subpar performance,” he said. “Usually, when these downturns occur, our research suggests there are only a matter of few days when the majority of returns are made. So, if an investor panics and sells at the bottom of the market and is out of that market when it bounces, they're going to lose out on those important days when markets bounce back. So, the point is stay invested for the long-term. Don’t lose hope and stay the course.”