The market’s movements on Tuesday followed a rally on Monday and a sell-off on Friday. According to Wells Fargo Investment Institute, this volatility is likely to persist. Doug Beath, a global equity strategist at the firm, noted in a recent report, “The sensitivity to trade and other issues may continue in the coming weeks of third-quarter earnings season. Expectations for earnings growth are high, and investors will likely focus on forward guidance regarding tech spending and tariff adjustments.” He also highlighted that ongoing government shutdowns could influence hiring and layoffs, impacting currency, interest rate, and equity markets.
In light of this uncertainty, certified financial planner Chuck Failla, founder and CEO of Sovereign Financial Group, emphasizes the importance of having a strategy in place for downturns. “We are still at all-time highs, more or less, for the market,” he stated. “If anything, today could serve as a wake-up call to do what you should do.” Failla recommends segmenting income and total return needs into different buckets and investing accordingly.
For funds needed within the next 12 months, as well as for emergency reserves, cash assets such as money market funds, certificates of deposit (CDs), and Treasury bills are advisable. “For short-term money, protecting your principal is key,” Failla explained. “You must accept a lower rate of return in exchange for security.” Despite the Federal Reserve’s recent rate cuts, solid yields can still be found. The central bank lowered the federal funds rate by 25 basis points in September and hinted at the possibility of two more cuts by year-end. Current annual percentage rates hover just under 4%, with the Crane 100 list of the largest taxable money funds showing an annualized seven-day yield of 3.94% as of Monday.
Laddering CDs of varying maturities can help spread out income, preventing the need for early withdrawals that incur penalties. UBS currently favors high-quality fixed income assets, anticipating slowing growth and heightened volatility due to fiscal pressures in the fourth quarter. Leslie Falconio, head of taxable fixed income strategy at UBS, stated, “We expect yield (carry), not spread compression, to be the primary driver of returns in the months ahead.” While she maintains a neutral stance on investment-grade corporate bonds due to tight spreads, she prefers agency mortgage-backed securities (MBS) and commercial MBS, which offer lower credit risk as they are backed by the U.S. government.
Investment-grade municipal bonds have also gained traction, appealing particularly to wealthy investors due to their tax-exempt status. UBS reports that these bonds offer a significantly higher tax-equivalent yield compared to similarly rated corporate bonds, especially for longer maturities. Sudip Mukherjee, a senior fixed income strategist at UBS, noted, “The appeal of munis remains wide as the breakeven tax rate is currently 24%.” He added that municipal bonds provide diversification benefits, exhibiting lower correlation with equity markets than corporate bonds.
While protecting portfolios against volatility is crucial, maintaining exposure to stocks during downturns is equally important, according to Failla. “Trying to time the market never works,” he cautioned, emphasizing that stocks have historically served as a hedge against inflation. For long-term investments, he allocates 90% to 95% to equities. Wells Fargo remains optimistic about stocks, projecting a year-end target of 7,400 to 7,600 for the S&P 500, with earnings growth expected to drive returns next year.
