The past 10-plus years have been marked by an unprecedented consistent economic expansion—a period in which booming, bullish markets have become ingrained in the investor psyche and risk has been reliably rewarded. Now, however, there’s a growing consensus in the investment community that markets are near their apex and greater volatility is on the horizon. While volatility isn’t necessarily a bad thing, it’s important to pay attention to key world events and their ramifications for the global economy. Significant drawdowns not only carry major implications for investors but they can also trigger economic setbacks.
2020 is already poised to be an inflection point in both politics and the economy. In the coming months, many “industry experts” (whether intentionally or unintentionally) may begin to propagate recessionary fears as they analyze hundreds of market events as possible harbingers for a new global financial crisis. Yet despite the myriad scenarios in play, investors should focus on two pivotal areas of concern: geopolitical tensions and the 2020 U.S. elections.
Certainly we’ve grown accustomed to geopolitical hot spots playing a role in every market cycle, often resulting in some sort of détente. Ongoing uncertainty about Brexit, fears about the coronavirus and further international conflicts may add to further market instability. These geopolitical tensions could have an immediate impact on the global economy, interest rates and valuations, causing increased volatility and falling yields as investors flock to safer assets such as U.S. Treasury Bills and cash.
The 2020 U.S. elections will undoubtedly have a resounding impact on the markets. It’s safe to expect the S&P 500 to respond to any change in leadership in the House or Senate, and investors should pay close attention to any government policy initiatives that may impact their financial future.
And as more and more of us turn to social media for our news, it’s particularly critical to remain prudent in considering the effect of policies that could impact energy costs, infrastructure spending and the cost of healthcare. Throughout history, technological innovation has portended policy change. With gradual consumer adoption of clean energy technology, investment in renewable energy could spur growth in infrastructure upgrades, employment, sustainable practices in other industries and a greater focus on ESG investing.
Nobody knows exactly how these scenarios will play out so it’s important to be well positioned to adeptly navigate potential volatility in advance by identifying suitable risk and return opportunities and building a portfolio that’s resilient to a market that may look very different from our present.
Diversification can enhance resiliency, which is the key to success for navigating the market cycles ahead1. A common thread across these current world events is that we can anticipate greater market volatility (along with pockets of market fear) so investors should prepare for the future by staying nimble, defensively diversifying while not backing away from risk and maintaining a disciplined focus on long-term goals.
1.There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss.
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