- Investors are growing increasingly worried about market volatility, fearing that it means a downturn is ahead, according to a recent survey by Allianz Life.
- While the S&P 500 has soared to new highs and bonds have rallied, there have been rocky days in financial markets as drivers like the US-China trade war hang over US stocks.
- Investors should heed professional financial advice to avoid panicking and doing the wrong thing with investments, says Kelly LaVigne, vice president of advanced markets at Allianz Life.
- Read more on Markets Insider.
Investors are more worried than ever that market volatility means a downturn is on the horizon, and are looking for ways to protect their money, according to Allianz Life’s most recent quarterly market perceptions survey.
Nearly half of those surveyed said they fear a major recession, marking a troublesome uptick in worried responses from both the first quarter of 2019 and last year. Investors also said they are less comfortable with current market conditions as volatility has risen, and are looking for ways to hedge against risk.
The survey was conducted online in May, and recorded responses from 1,006 individuals over the age of 18.
The numbers did not come as a surprise after the S&P 500 posted its worst month of the year in May, then made that loss up entirely in June. Experts at Allianz note that such market swings capture the cautious attention of investors, even as stocks climb to new highs.
"We’ve been running for a long time with a good market so it’s almost natural when even small things occur and volatility goes up that people get apprehensive," said Kelly LaVigne, vice president of advanced markets at Allianz Life told Markets Insider.
The US economic expansion is now the longest on record, having continued for over 10 years. While longevity is not what ends economic expansions, consumer sentiment can definitely factor into market performance long-term.
Right now, there are a few market drivers that have contributed to whiplash. For instance, stocks fall whenever there is negative news about the trade war between the US and China, but rise at any sign of encouragement.
In addition, with both the stock and bond markets pricing in a Federal Reserve rate cut at July’s meeting, any development to the contrary — or disruption to that status quo — could quickly whipsaw either asset class.
This comes at a time when investors are grappling with unique market conditions. Both stocks and bonds are rallying, which is unusual as bonds are generally seen as safe haven assets, while stocks are a riskier investment. As the S&P 500 has soared above 3,000, bond prices have soared as well as 10-year yields fall below 2%.
That means that a downturn could impact both equities and bonds, which some industry watchers are calling a "correlation trap," said Olivier Marciot, senior vice president and investment manager at Unigestion SA. Because stocks and bonds are moving in the same direction, it makes hedging — or protecting assets with balanced investments — more difficult.
In response to this mounting threat, Marciot’s firm has lightened exposure to both equities and bonds. He told Markets Insider Unigestion is now only slightly overweight stocks and underweight bonds going forward.
"There is a good environment for a carry trade," Marciot said, refers to the practice of borrowing at a low interest rate and investing in something with a higher rate of return. "We are being very prudent in the medium term."
Marciot also said that all of the positive news around dovish central banks is already priced into markets, meaning that room for growth may be capped or slow going forward. This means different things for investors with different timelines, especially as good opportunities for making money in the market have become less obvious.
The Allianz study found that older investors, baby boomers, were the most nervous about the state of their portfolios. This makes sense, because as investors near retirement age, conventional wisdom suggests they should be carefully watching the market to protect their investments.
By that same logic, younger investors don’t need to worry quite as much, as they would have more time to recover from a downturn in the market now. In addition, there are some upsides to cyclical market downturns — stocks become a lot cheaper, meaning it’s often a good chance to buy.
LaVigne said that it’s important for investors to remember that investing in the market is a long-term game, not just about the amount gained or lost in between statements. That’s why it’s best to have an advisor that can help take some of the emotion out of investing.
"Without professional advice, most consumers do the opposite of what you’re supposed to do — they buy high and sell low," LaVigne said.
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