Volatile markets make for uncertain and potentially scary times for investors. Via email, we talked to Christine Benz, Morningstar's director of personal finance, for her thoughts on five questions related to market conditions for the rest of 2022.
Going all-in on one possible economic scenario or assuming the worst is over in stocks and bonds would be risky for investors now, she says, warning, "This is not the time for dramatic, either-or gestures."
Here are Benz's responses to ThinkAdvisor's questions about market volatility:
1. What's your view on where volatility is headed in Q3 & Q4?
Christine Benz: I don't know, but there are a lot of unpredictable variables swirling around that could contribute to excess volatility in the second half. If the Fed's interest-rate increases don't do the job of curtailing inflation, we could have additional inflationary shocks which would likely be followed by further interest-rate increases.
And if the Fed overcorrects, the U.S. economy could tip into recession. Add in the midterms and the war in Ukraine and the stage is set for further volatility.
On the plus side, equity valuations are now a lot more reasonable, which makes stocks less vulnerable to some of these exogenous shocks. And interest rates have already gone up quite a bit; higher bond yields help offset some of the principal-related volatility that bonds have experienced thus far this year.
2. What are the greatest risks and opportunities for investors in this environment?
The greatest risk is casting your lot with a specific scenario that may or may not come to fruition. This is not the time for dramatic, either-or gestures. For example, if you position your portfolio for further inflation and interest-rate increases, purging it of bonds and leaning into economically sensitive stocks, your portfolio is then poorly positioned for a recessionary environment.
