Top of the Morning: Why we're not worried - and you shouldn't be either
The desk interprets the recent commentary from UBS as an affirmation of resilience in the face of market fluctuations, arguing that educational strategies during downturns allow investors to seize opportunities. Per the full note source, historical patterns indicate that corrections and bear markets are often followed by swift recoveries, reinforcing confidence among traders. As we see market volatility persisting, this guidance holds relevance, positioning traders to adapt effectively. Currently, consensus forecasts reflect an optimistic range for the EUR/USD.
What the desk is arguing
The desk contends that despite the recent market volatility, the principles shared in the UBS commentary underscore opportunities for traders. By highlighting the importance of preparation and education, the discussion suggests that investors should view downturns as temporary phases. Per the full note source, the historical recovery periods for corrections emphasize that markets can rebound quickly.
Supporting this view, historical S&P 500 data illustrates that the average duration of corrections has decreased significantly, often recovering within months rather than years. For instance, corrections of 10% typically revert to prior peaks within 3-4 months, while bear markets have shown resilience as well, often lasting less than a year before recovery begins.
Where it sits in our coverage
Our consensus target for EUR/USD sits at 1.075, with a range reflecting broader market sentiment. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective is aligned with firm views at the upper bound of the range, potentially setting the stage for bullish momentum in the coming months.
How other firms see it
Several firms, including jpmorgan and goldmansachs, align with the optimistic outlook, suggesting market corrections are manageable and provide entry points. In contrast, bofa holds a contrary viewpoint, indicating a more cautious approach.
Indicators like the ECB's interest rate trajectory and U.S. job growth statistics will be critical as they could have secondary effects on currency pairs such as EUR/USD and GBP/USD. The interplay between these economic indicators may heighten volatility in exchange rates moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market downturns can offer unique investment opportunities.
- 02Historical corrections often see rapid recovery.
- 03Education is key to alleviating investor anxiety during volatility.
- 04Consensus sentiment remains optimistic for EUR/USD at 1.075.
Market implications
Traders should monitor EUR/USD for signs of upward momentum, especially if it approaches the upper target of 1.10. Given the recent commentary, shifts in positioning could be seen as traders align with the bullish perspective outlined by UBS.
Risks to this view
A significant catalyst that could disrupt this outlook includes unexpected economic data from the U.S. or Eurozone that signals a downturn, particularly regarding employment figures or inflation rates. Additionally, geopolitical tensions could introduce volatility that influences trader sentiment negatively.
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
For today, we are joined by senior total wealth strategist with the UBS Chief Investment Office, Justin Waring. Justin recently released a blog. The title is Why We're Not Worried, and You Shouldn't Be Either.
This, of course, in reference to the recent market swings we've been witnessing. So with that, Justin, a great timing that you're joining us today. Thank you for dropping by Top of the Morning to spend some time with our listeners and our clients.
Welcome back. Thanks for having me, Dan. So, Justin, within your latest blog, you do spend some time discussing how despite it being, of course, natural for one to feel anxious during periods of market turbulence, which we have been living through in recent days, there does exist reasons for investors to feel confident and calm.
So let's spend some time this morning diving into those reasons, beginning with typical duration of these downturns. What's important to keep in mind there? Yeah, I just want to say at the outset that in order to help our clients become calm during market environments and help them view the opportunities that exist when we have a downturn, education is key.
And when we look at historical bear markets, they aren't as scary as they seem. So there's really two categories of drawdowns that we have given specific names to. One of them is a correction.
So a correction is a 10% or larger drop in the S&P 500. And a bear market is a 20% plus drop. As of this last Monday, we were intraday over the 20% barrier.
But the general convention is that we need to see that drawdown actually happen at the close or, you know, at least last a little bit longer than a couple trading hours. And when we look at past corrections, the recovery is very fast. We've seen market corrections almost every year.
If you look into a year from a peak to drop drawdown, they tend to be recovered within just a couple of months. And the real reason why we give bear markets their own name and why the 20% threshold is so important, even though it's a little bit arbitrary, is because bear markets tend to take longer to recover from. So the historical time it takes to recover from a bear market is usually measured in years.
So for the S&P 500, if you look at every bear market since 1945, which we did in our bear market guidebook report, we can see that the average bear market took about three years to recover from. But the longest bear market was the tech bubble. It took 6.2 years, so about 74 months to recover from the market peak all the way back to a new all-time high.
And then actually, the global financial crisis started just a couple of months later after that recovery period. And that took about four and a half years to recover from from peak to new all-time high. And so the duration and the size of the drawdown both matter, because that is the size and impact that a bear market can have on our clients' assets.
If you're selling during a bear market, the depth and the duration of the bear market matters. And so when we talk about a liquidity strategy to cover three to five years of spending, the reason we're saying three to five years is because depending on which type of portfolio you're invested in, it has historically taken between three to five years to fully recover your losses during a bear market. And so that should be the first and foremost thing to educate clients about, because that demystifies a lot of the risks that go around bear markets.
Bear markets, as you said, are very scary and make our clients anxious. So forewarning our clients about that risk and how we can address it is really, really important to making them feel calm and starting to be willing to take advantage of the sell-offs. So, Justin, with that now in mind in terms of what investors should be doing, should not be doing during periods of market turbulence, how can investors protect against the risk of locking in temporary losses?
That's a great question. So the liquidity strategy is really the first line of defense. If you have any spending needs out of the portfolio in the next three to five years, those are the dollars that are at risk.
If they were invested in the stock market, those are the dollars that are at risk that you would have to sell at a bear market price because your bill comes due and you need to raise cash. You're forced to sell the stocks. So having a liquidity strategy is really the first line of defense against bear markets or any kind of market drawdown.
And if you're in your working years, then you don't need to have that much cash to the side for spending because your paychecks are coming in and paying for your spending. And hopefully you're actually saving on net. And that means that bear markets are actually good for people who are in their working years, as long as they can keep their jobs.
Of course, bear markets do come with recession risk and that leads to a heightened risk of job losses. But bear markets are actually good for investors who are in their working years. Now, the caveat to that, of course, is that you want to still have an emergency fund in case you have an interruption to your income or in case you have an unexpected expense of about six to 12 months of spending.
You should have set aside in a liquidity strategy even during your working years. But the main people who have to worry about protecting against short-term losses are people who are transitioning into retirement or who are into retirement. Because when you're actively living off of your portfolio, you are subject to what's called sequence of returns risk.
If you're forced to sell during a bear market drawdown, there's not as much capital left to recover. And now in the next bull market, there won't be as much capital to support your spending. And this can cause dollar costs ravaging, sometimes they call it.
It will eat away at the principle of your portfolio and potentially force you to change your financial plan. So, yeah, the liquidity strategy is the main line of defense. The other line of defense that's really important is having a balanced and diversified longevity strategy.
We talked earlier about three to five years being the time it takes to recover for a portfolio. Well, that's not necessarily true if you only own Amazon stock or if you only own a small company. If all of your wealth is tied up in undiversified asset, then it might take longer to recover from drawdowns.
And so that's one important thing to bear in mind, both during bull markets and bear markets, is that diversification helps us to not only reduce the size of drawdowns, but also improves the time to recovery, which means that during bull markets, we don't need to have as much safe assets to offset the risk of the main portfolio. Well, Justin, very helpful guidance, of course, for our clients of UBS listening in. I do encourage you to have a conversation with your UBS financial advisor about the construction and applications of the strategies that Justin is referring to.
Justin, this was interesting reading through your blog. You spent some time highlighting how periods of market volatility could, in fact, present opportunity for investors. So how should investors proceed with that?
How can they potentially take advantage of volatility in the markets? So when you understand bear markets and you know how dangerous they are, but know that they're temporary, and when you have a liquidity strategy that's going to help you avoid being forced to make any bad decisions, it really does open up a lot of opportunities. When market pricing is out of whack, the first thing that you should think about doing is tax loss harvesting.
If you have automatic tax loss harvesting, you don't have to even think about it because it's happening automatically in your portfolio. But tax loss harvesting is really valuable because if you harvest a capital loss during a drawdown and switch into another investment to maintain exposure for the rebound of the market, you're able to then use that loss to offset capital gains. And actually, each year, you can spend up to $3,000 a year against your other taxable income.
And so that will help you reduce your taxes, keep the dollars that you would have given to the IRS growing in your portfolio. And if you are able to defer capital gains until the end of your life, you may actually be able to avoid capital gains taxes entirely. So that can be a huge boost to your wealth over time.
Another thing to do is rebalance. If you start with a 60-40 stock bond portfolio and the market goes down, bonds tend to hold their value or rally during sell-offs, especially bear markets, because bear markets tend to come with recessions. And recessions tend to come with falling interest rates.
And falling interest rates tend to boost bond prices. So if you think about that, if your stock prices go down and your bond prices stay the same or go up, your 60% stock, 40% bond portfolio is no longer at its target allocation. You might now be 55% stocks and 45% bonds.
And so rebalancing, selling high on the bond side and buying low on the stock side can be a good way to make sure that your portfolio is still in line with the target that you set and position you for outperformance on the recovery. Other strategies abound, really. There are lots of strategies that you can talk about with your financial advisor.
For example, if you are already thinking about doing a partial Roth conversion where you pay taxes today to move money from a traditional pre-tax IRA to a tax-exempt Roth IRA, doing so during a market drawdown can reduce the cost of the Roth conversion. And you now have tax-free growth on any dollars that are from the point of the sell-off forward. So during the recovery, all of that will be tax-free growth.
Other strategies include gifting strategies. If you want to give money to others, there will be less tax consequences for gifting them when the asset value is depressed. So if you're a family that is subject to the estate tax or if you're trying to get the most out of your annual gift tax exclusion, these are strategies that can also help.
But it really is valuable to talk to your financial advisor to think about these concepts and others that might arise with your personal circumstances. Yep, a lot of consideration. So continuing the conversation is indeed encouraged.
With that, Justin, as we begin to close out today, you've left our clients, our listeners, with a lot to think about. Any final thoughts, takeaways, or anything you would like to reinforce to our listeners before we wrap up? Well, I do want to mention that when we talk about the liquidity strategy as a protection against bear markets, we want to fund that strategy with cash, bonds, and borrowing capacity.
In a bull market, if you have too much cash and too much in safe assets, it can be a drag on your returns. And so one consideration is to fund maybe three years of spending with cash and short-term bonds. And then if we end up in a bear market that goes five years, you may want to consider tapping into your borrowing capacity in the fourth and fifth year.
Now, remember, if we're in a bad bear market, and that's usually associated with a recession, the Fed will have lowered interest rates to support the economy. So your borrowing costs might be pretty low if you've pursued this strategy. But in order to have that resource available to you, you need to make sure not to use all the leverage that you have available to you during the bull market.
And so one thing to make sure of is just to, every year, talk to your financial advisor about how much spending you have in the next three to five years, and work with them to come up with a strategy that is aligned with your specific spending needs and the resources that you have available to you. Because if you set aside untapped borrowing capacity during a bull market, it's not really going to cost you anything because you're not paying interest on debt that you haven't tapped into. So that's another strategy I didn't mention earlier that I think is valuable to think about.
Interest rates are relatively high right now, but if you set aside that resource today, in case a bear market happens and in case the bear market goes on for more than three years, that can be a very effective strategy. Well, Justin, as always, very helpful to hear this guidance, especially during times of market volatility, such as we're living through at the moment. So all the more, Justin, thank you for dropping by top of the morning today to spend some time with our listeners and clients.
Appreciate it. Thanks for having me. Again, today we have been joined by Justin Waring, Senior Total Wealth Strategist with the UBS Chief Investment Office.
Justin has been making reference to his recent blog. The title is Why We're Not Worried and You Shouldn't Be Either. This blog is now available up on ubs.com forward slash CIO.
For clients of UBS, be sure to reach out to your UBS financial advisor if you would like to receive a copy of Justin's blog directly. From UBS studios, I'm Dan Cassidy. Thank you for joining us.
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