Investing with Confidence: Lessons from Turbulent Markets

May 12, 2023

Navigating the Debt Ceiling and Banking Woes: Potential Opportunities for Investors

As the debt ceiling and challenges plaguing banks dominate the headlines, it’s understandable if one feels a sense of apprehension regarding the current state of affairs. However, while these issues may continue to create volatility in the markets, we believe they are unlikely to spell the end of days for the economy. Rather, amid this turbulence, there may be compelling long-term opportunities for investors who can remain calm and calculated. In this post, we’ll delve deeper into the intricacies of the debt ceiling, the issues facing the banks, and their potential impact on the markets, while also highlighting potential investment opportunities during these uncertain times.

The US Debt Ceiling: What You Need to Know and How it May Affect the Markets

On January 19, the US government hit the debt ceiling triggering budgetary conflicts. The Treasury has responded with some tricks to delay running out of money but may exhaust options as soon as June 1. Although both sides are posturing their hard lines, it’s likely the debt ceiling will be extended and the US will honor its obligations, sidestepping an unprecedented default. Nonetheless, the prospect of unpredictability may exacerbate market instability in the near term.

The Banking Sector Woes: Causes, Effects, and Potential Opportunities for Investors

The banking sector’s current predicament stems from their equity capital buffers, which declined due to losses recognized on certain assets. Unlike the Great Financial Crisis (GFC) of 2008, the source of the banks’ problems are not low-quality, poorly underwritten mortgages but high-quality bonds whose value declined in response to interest rate hikes. The federal reserve’s rate hiking efforts may be nearing an end, providing some relief to the banking sector.

As history has shown, every crisis presents an opportunity. Many banks are trading at historically low valuations and could be useful long-term ingredients in a diversified portfolio. While some investors may be tempted to exit all financial stocks now, or even the equity market at large, such impulses are rarely rewarded.

Lessons Learned from the Great Financial Crisis: Attempting to Invest Wisely During Market Turbulence

Looking at the 2008 GFC as an analog, the financial sector represented 20.9% of the S&P 500, whereas today, it is only 12.9%.  Over the fifteen years that followed the collapse of Bear Stearns, which was often cited as the first big domino to fall on March 8, 2008, the S&P 500 still returned 266% or 6.6% annualized. Investors following a disciplined rebalancing strategy would have purchased more equities at increasingly discounted stock prices in the following months as markets plumbed their GFC lows.

Maintaining Composure in the Face of Market Turbulence: Understanding Your Risk Tolerance and Developing a Plan

During periods of market turbulence, maintaining composure can be challenging. Often, people tend to make decisions impulsively out of fear when their expectations around portfolio volatility are misaligned with reality. However, every investor has an emotional financial mercy point, beyond which exiting and capitulation may seem like the only option. It’s crucial to identify the downside risk that one can tolerate, understand the possibility of encountering it, and have a plan in place to make portfolio decisions calmly and confidently even amidst widespread panic.

Whether debt ceiling, or banking turmoil or the extensive roster of prior crises that have steamed to a feverish boil in the media, it is impossible to predict the exact outcome of such situations. No one should or can promise avoidance of market downturns; that is the inherent nature of investing.  Nonetheless, investors can attempt to align a portfolio with the magnitude of downs you are willing to accept, creating a foundation for remaining calm and identifying opportunities during turbulent times.

Elias Bachmann, Director of Investment Group