Top of the Morning: Five actions to help manage uncertainty
Currently, the desk emphasizes that managing investment strategies amidst ongoing market volatility is crucial to avoid unnecessary losses. Per the full note from UBS, strategies that prioritize staying the course and refraining from prompts to withdraw during market downturns have historically proven beneficial. With fears of economic recession mounting, the emphasis on long-term recovery—usually seen within a three to five-year timeframe—serves as a critical reminder for investors to maintain their strategies. This perspective aligns with a growing consensus among market participants, as many firms remain cautious amid signals from central banks regarding potential policy shifts.
What the desk is arguing
The desk posits that the current market volatility presents a risk, primarily for investors who might be tempted to alter their strategies reactively. As investors face heightened concerns about recession, UBS advises against making snap decisions and highlights the historical trend that diversified portfolios typically recover fully within three to five years following a downturn.
Key to this approach is the understanding that retirees, unlike those in their earning years, find it more challenging to avoid withdrawals. The risks of this behavior can lead to locking in losses that might otherwise be recoverable over time.
Where it sits in our coverage
Our current consensus target for the EUR/USD sits at 1.075 with a range from 1.04 to 1.12. Notable firms contributing to this outlook include: - JPMorgan with a target of 1.10 for March 2026 - BofA placing a lower estimate at 1.04 for the same tenor.
The desk's stance leans towards the upper end of this range, reflecting a belief that market conditions will favor a recovery rather than further declines.
How other firms see it
The consensus shows alignment among firms like JPMorgan and Goldman Sachs, who hold a positive long-term outlook, suggesting a potential recovery in the euro. Conversely, BofA takes a more cautious stance, predicting a weaker euro given the economic uncertainties.
Monitoring the EUR/USD trajectory in relation to growth forecasts and central bank decisions will be essential, particularly as market dynamics continue to fluctuate.
What the calendar says
With no high-impact events on the horizon, traders should focus on the current economic data releases and sentiment indicators as potential catalysts for currency movements over the next month.
01Investors should avoid reactive strategy changes during periods of volatility.
02Historically, diversified portfolios can recover from losses within three to five years.
03Retirees face higher risks due to reliance on portfolio withdrawals during downturns.
04Current consensus aligns with cautious optimism but varies across major firms.
Market implications
Watch for EUR/USD behavior as it tests the upper boundary of 1.075, particularly if data suggests sustained economic resilience. Attention should also be paid to upcoming economic indicators that could shift sentiment.
Risks to this view
Should central banks signal an aggressive rate hike or exceptionally poor economic data emerge, the current outlook may shift rapidly, leading to potential new lows in currency pairs tied to investor sentiment.
ubs
Hi everyone, Dan Cassidy here, welcome back to Top of the Morning on the UBS Market Moves podcast channel. The global stock market has dropped substantially in recent weeks and investors are increasingly worried about the risk of an economic recession. During such periods of high uncertainty, it is tempting to make changes to one's investment strategy.
So joining us for the conversation today, glad to welcome back Justin Waring, Senior Total Wealth Strategist, as well as Ainsley Carbone, Retirement Strategist. Ainsley and Justin are joining us today to discuss strategies to consider in light of the recent market selloff. So with that, Ainsley, Justin, thank you for dropping by Top of the Morning and for spending some time today with our listeners and clients.
Welcome back. Thanks for having us. Great to be here.
So to get started, Ainsley, as mentioned, we have seen a fair amount of volatility in the markets in recent weeks. How can investors effectively protect against the risk that this pullback will get worse and what changes shouldn't they make? Well, when we look at how most diversified portfolios have done during past bear markets, they have typically recovered fully from their losses within about three to five years.
So if these portfolios had been making portfolio withdrawals during that time period before they fully recover, well, they would have been locking in those losses. However, investors who were able to refrain from making portfolio withdrawals during that recovery time would have been able to avoid that bear market damage. So for investors in their working years, this is easier to do to avoid taking portfolio withdrawals because we can live on our incomes to support our spending.
However, for retirees, it's a little bit of a different story because they rely on their portfolios to support spending, so there's a little bit more risk involved, or actually a lot more risk involved. So if you have spending needs in the next three to five years, you can protect yourself against the risk of bear market damage by building a liquidity strategy portfolio with resources like cash, bonds, and borrowing capacity that are set aside and dedicated to meet these needs over the next three to five years. So setting up this type of liquidity strategy portfolio, it's going to help you to reduce the risk that you'll be forced to sell long-term risk assets, which would lock in otherwise temporary losses.
So in terms of changes that investors should be avoiding at this time, we recommend against making major changes in your portfolio in response to the market. Now I know it can definitely be tempting, but if you think about it, your investment portfolio and your financial plan were built to help you accomplish your goals in a variety of possible market scenarios, so just make sure that you're only making changes if your goals have changed. And if you do choose to respond to the market pullback, make sure you limit those changes to small tactical adjustments that are going to be consistent with your overall investment strategy and overall financial plan.
Well, Ainsley, thank you for that guidance and clarity Justin wearing to welcome you into the conversation. On the other side of it, can you explain to us the importance of rebalancing a portfolio during market volatility and how can investors identify tactical opportunities to enhance their portfolio's resilience? Absolutely, Dan.
I think this year is a great example of the value of global diversification. We've seen a double-digit gain in international equities, even as we've seen a drop in U.S. stock market. And so this is, you know, there are parts of the portfolio that are holding up quite well during this drawdown.
In fact, like the stocks that are getting hurt the most, that are down more than 20% are the Magnificent Seven, the stocks that rallied a whole lot in the last two years. So rebalancing during a period of market volatility is essentially a way of implementing a buy low, sell high strategy. We want to trim the recent winners and buy the recent losers so that when there's a rebound and in these stocks that have lost a little bit of value recently, we're able to fully participate.
And, you know, when we look tactically at how the CIO is positioning portfolios, we do view equities as attractive, especially U.S. equities. There are a lot of names that we really like in the tech space, communication services and information technology, that are now trading more than 10% below their last all-time high. Valuations are more attractive again.
And so just rebalancing to get back to a target allocation for those stocks is already a great step. We also view agency mortgage-backed securities and investor-grade corporate bonds and senior loans as attractive within the fixed income side of the space. So rebalancing a little bit just to get back to your long-term target, it doesn't require crystal ball.
It's just basically reaffirming your long-term investment asset allocation target. And that'll help you position yourself for a potential rebound in the market, which is what we expect as our base case. Thank you, Justin.
So Ainsley, seeing as how it is tax time, what are the key benefits of tax loss harvesting and how can investors implement this strategy throughout the year to maximize their after-tax return potential? So tax loss harvesting is the process of selling tax lots to intentionally lock in capital losses. And then it's often followed by reinvesting the proceeds back into a different investment product in the same asset class.
By realizing capital losses today, it can help you offset capital gains in this tax year. So if you still have capital losses left over after gains that year, you can deduct $3,000 against your ordinary income. And each year, any unused realized losses can be carried to future years.
So tax loss harvesting can help to reduce your portfolio's after-tax return potential by lowering your taxes this year. Another benefit is that without tax loss harvesting, you will need to pay capital gains taxes to the IRS when you sell your investments. This is going to deplete the amount you have left to invest today, and it reduces the dollars growing in your account.
So if you're able to tax loss harvest, tax loss harvesting can help to keep your tax dollars growing in your account. And a third benefit is that it can help you to potentially avoid capital gains taxes altogether to the extent that you're able to defer the capital gains until you give them to charity or defer until you get a cost-basis step-up when you pass away. Over the long run, your portfolio is going to generate significant capital gains.
And because markets typically tend to go higher, capital losses, they're only going to occur occasionally, and they'll only last for brief periods of time. So it's important to make sure that you are regularly harvesting capital losses. So to regularly harvest your losses and do so systematically, if possible, it's going to help make sure that you can take advantage of these opportunities before it's too late.
So if you choose to do this yourself, we suggest looking for loss-harvesting opportunities monthly and also during periods of market volatility. Otherwise, I would suggest looking to outsource this task to a tax overlay manager that will execute loss-harvesting and capital gains deferral on an ongoing basis for you. This will just help to make sure you avoid any missed opportunities that would occur throughout the year, and it'll also just help free up some of your time rather than having to do the ongoing monitoring yourself.
And then, Justin, how does a market downturn create an opportunity for a Roth conversion? And what factors should investors consider when deciding the timing and amount of a partial Roth conversion? A market drawdown allows us to implement a Roth conversion at a lower tax cost because when you convert a portion of your traditional IRA to Roth, you pay a tax as ordinary income of the amount that's converted.
And when the market's down 20%, that means that you have 20% less tax that you pay on that conversion, or at least 20% less taxable income, which will result in less tax burden for the year. Now, this also means when the market recovers, all of the growth from when you converted it will be tax-free. And so this is why sometimes we look at investors who are already considering a partial Roth conversion, market drawdowns can be an opportunity to do that at a lower cost.
Now, who should be considering a partial Roth conversion in the first place? Well, the best candidates for this are people who are in a lower tax year, a lower income year than they normally are. This is especially true for people who have recently retired.
If you leave your career having had really, really high earnings and your salary goes away, those early retirement years before you have taxable income from Social Security or required minimum distributions from your investment accounts, these could be years where you're in a very low tax bracket, and these are the best years to implement a partial Roth conversion. So this really, the best time to implement a Roth conversion is during a year when you have lower than usual level of taxable income, and a market drawdown can just enhance the value of a Roth conversion by reducing the tax cost. To decide how much to convert, it's really worthwhile to take a look at your current taxable income and also estimate your taxable income in the future to understand what tax bracket you're in today versus what tax bracket you'll be in the future, and then potentially fill up the tax brackets that are in between.
So if you're in the 12% tax bracket today and you're going to be in the 35% tax bracket in the future, you may want to fill up all the way to the 35% tax bracket to take advantage of the lower tax brackets that you have access to in the current tax year. So the best strategy to get this started is talk to your financial advisor and coordinate with your tax advisor. Okay, so a lot of considerations there to be mindful of as we begin to close out today's conversation.
In what ways can embracing flexibility in spending and borrowing strategies improve an investor's ability to navigate market drawdowns and capitalize on future market rebounds? Well, as we said earlier, withdrawing from your long-term portfolio during periods of a market drawdown will lock in otherwise temporary losses. So if you don't have enough resources, let's say, set aside in a liquidity strategy, temporarily reducing or postponing some of your spending needs during a market drawdown will allow you to keep more of your portfolio invested and enhance your portfolio's ability to benefit from a market rebound.
If you can't delay spending, another strategy is to tap into borrowing capacity. Balanced portfolios have historically outperformed borrowing costs on a fairly consistent basis. For instance, a 60-40 portfolio would have outperformed a loan's borrowing cost in about 74% of past two-year rolling return periods, with an average outperformance of about 3.4% per year.
So tapping into your borrowing capacity to meet spending needs can also help you to keep more of your portfolio invested and therefore enhance your portfolio's ability to benefit from a market rebound. Well, Ainsley, Justin, as always, a very insightful conversation. We do appreciate your guidance and insight as we navigate these markets.
So thank you for dropping by and for spending some time with our listeners today here on top of the morning. Thank you, Dan. Thanks for having us.
Again, today we have been joined by Justin Waring and Ainsley Carbone from the UBS Chief Investment Office. I do want to highlight a recent piece from the UBS Chief Investment Office on planning strategies to implement during a drawdown. This ties right into our conversation today with Ainsley and Justin.
The title of the piece, Five Actions to Help Manage Uncertainty, this piece is now available for you up on UBS.com forward slash CIO, though for clients of UBS, simply reach out to your UBS financial advisor if you would like to receive a copy directly. From UBS studios, I'm Dan Cassidy. Thank you for joining us.
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