Advisers scramble to make sense of recent market volatility

With the S&P 500 Index down more than 3% over the first five days of March and hovering near its level at the start of the year, financial advisers say some clients are starting to worry that stocks are heading for a repeat of the market volatility seen in March 2020, when stocks fell by more than 20% over three weeks.

Last year’s pullback was linked to growing fears about the impact of the still relatively unknown Covid-19 virus, which is not what's driving the markets now. But the memory is fresh enough that advisers say some clients are getting nervous.

“I have started to get phone calls from clients looking to rebalance and take some of the profits from positions that have really run,” said Matt Chancey, a financial adviser at Dempsey Lord Smith.

“The last time I got calls like this was March 2020, so what is currently happening in the market now is stirring up some of those same emotions and concerns,” Chancey said.

The technology-heavy Nasdaq Composite Index, which has been dropping along with the S&P 500 since Monday, is down 2% from the start of the year. But the volatility that is drawing most of the questions from clients relates to the recent ride by the S&P.

After peaking on Feb. 16, when it was up 6.3% from the start of the year, the S&P pulled back slightly for a 1.4% decline through Feb. 22. Two days later the index gained back 1.3%, then fell by 2.9% to Feb. 26 before rallying by 2.4% to Monday; it has been downhill since.

Financial advisers and market watchers are scrambling for answers to the recent volatility, including pointing to rising bond yields that signal potential inflation on the horizon and a typical market rotation away from growth stocks, especially the technology sector.

“This appears to be more of a rotation within the market versus what we saw during last year’s market crash,” said Justin Shure, founder of Endeavor Strategic Wealth.

“Tech and growth names have benefited from low rates, and have significantly outperformed the traditional value sectors,” Shure said. “It looks like the higher yields are benefiting the commodity-sensitive sectors. I'm reducing exposure to the growth names and adding dividend stocks that are benefiting from the rotation. For bond risk, most portfolios have been in short-term bonds and will continue to stay there for the foreseeable future.”

Jared Friedman, chief executive at Redwood Financial Planning, also sees the recent market activity as rotations and reactions to the economy opening up as the pandemic threat starts to ease.

“In the short term, this will happen,” he said. “Bond yields will come up a bit, but growth stocks will be fine and tech stocks will be fine.”

Beyond his own clients, Friedman said some of his acquaintances who have become active traders on popular investing apps are starting to show signs of panic.

“My friends who have been buying Tesla and GameStop are the ones freaking out right now because they’re down 40%,” he said. “That’s a different mindset.”

Scott Bishop, executive vice president of financial planning at STA Wealth Management, has taken a proactive approach with his clients by sending out a memo to put the recent market volatility into context.

In addition to describing the market pullback as a “relatively healthy rotation that does not meaningfully change our outlook moving forward,” Bishop explained that the short term will likely present modestly higher inflation rates.

“However, this is only the first side of the inflation coin,” he wrote. “The second side of the inflation coin is in the long term, and although we see a less clear picture at present, we would argue that inflation in the longer term may turn out to increase but be fairly benign.”