Financial Advisors Try to Make Sense of Market Volatility

The sudden burst of stock market volatility, including a 7% drop by the Russell 2000 Index over the past week, has left financial advisors and market watchers scrambling for answers and analogies.

“A few things are converging at the same time and that is shifting the focus of the market away from policy and towards the growth outlook for the next 12-to-18 months,” said Steve Kolano, chief investment officer at Integrated Partners in Waltham, Mass.

The stock market opened Friday to a disappointing jobs report, which pulled the Russell down more than 4% in morning trading and sent the S&P 500 Index dipping nearly 3%. (The S&P recovered some lost ground and was more recently down 2%). Friday’s employment news capped a week of earnings disappointments for some of the biggest names in the technology sector, collectively represented as the Magnificent Seven.

Volatility Spikes in Market Pullback

The market volatility suited the VS Trust 2X Long VIX Futures ETF (UVIX), which was up more than 37% in mid-day trading Friday.

Predictably, the flipside of that was the VS Trust 1X Short VIX Futures ETF (SVIX), which was down almost 20% by mid-day Friday.

Kolano said it all adds up to signs of slowing growth, “which is good for the inflation outlook, but now the question is how much is the growth slowing?”

Rick Wedell, president of RFG Advisory in Birmingham, Ala., said the market is responding to new concerns of a looming recession.

“That’s the narrative that’s in the market now,” he said. “It’s very clear with this week’s jobs report that the first interest rate cuts are coming in September, and we might be surprised at the pace after that.”

Regarding investment strategy, Wedell said, “keep yourself balanced.”

“The S&P 500 is down 1.9% for the week and the Barclays Agg (bond index) is up 1.3%,” he said. “That’s the beauty of a balanced portfolio.”

Andrew Herzog, associate wealth advisor at The Watchman Group in Plano, Texas, increased allocations to small cap stocks and intermediate-term bonds in anticipation of interest rate cuts later this year.

“Recent rallies over the past year have pushed equity values pretty high, and that momentum can only continue for so long because markets don't move in a straight line,” he said. “Historically, there is increased equity market volatility this time of year, so we're telling clients to stay calm and focus on the long-term, as per usual.”

It is a similar message of calm from Tim Holsworth, president of AHP Financial in Midland, Mich.

“This reminds me of my fishing, because the fish bite the least when the wind comes from the east; it just does,” he said. “The market stalls in the summer and fall, it just does. Sell in May and go away is a slogan for a reason.”