Diversification using commodities is a key to weathering the volatility created by the current geopolitical situation, according to Matthew J. Bartolini, head of SPDR Americas Research at Boston-based State Street Global Advisors, an investment management company with $4.1 trillion in assets under management.
But at the same time that Bartolini gave guidance for advisors and their clients, he emphasized that uncertainty overlays the market.
“Because of the inability to predict what will happen in the next few weeks or months, advisors and investors should be looking at the long term to weather the downside risk of a volatile market,” Bartolini said in an interview.
“Volatility has been, and will be, quite elevated,” he added. “The market has had some of its best performing days and worst performing days recently.”
“Russia’s unprovoked invasion of Ukraine has taken a grave human toll and ushered in a new era of geopolitical conflict,” Bartolini said in a recent blog post. “The Russia-Ukraine War also has led to a significant market dislocation, with currency, stock and bond volatility increasing to one-year highs.”
As of March 3, the S&P 500 Index had 12 days of gains or losses greater than 1% over the preceding 20 trading days.
“Given the number of known unknowns related to the war and the resulting volatility, now is the time to trust in diversification by relying on traditional risk mitigation tools such as Treasurys, gold and liquid alternatives,” he said. Gold, in particular, provides a stable hedge to volatility, he emphasized. “Gold has a low correlation to both equities and bonds. Equities have a negative correlation to uncertainty, but gold has a positive correlation to uncertainty.”
The war in Ukraine is not the only risk the market is facing now, he said. Covid still poses a problem and the actions of the central banks are a factor, Bartolini said. “Elevated inflation will make the central banks raise rates soon, which will impact the bond market,” he said.
Also impacting the economic outlook is the fact that earnings predictions for the year are not as strong as had been predicted, he said.
Advisors should be telling clients to review the asset classes they are in,” he added, noting industrial metals, oil, and agriculture will have advantages.
While assessing options, investors need to keep in mind that trying to time the market is not a good answer to uncertainty, he said.
“History hasn’t been kind to investors who rotate out of equities based on severe market declines,” Bartolini explained. “Using returns on the S&P 500 Index dating back to 1950, average subsequent six-month returns following the worst 20 one-day returns is 27%. In fact, only two time periods saw negative returns, and only one of those was double digits.”
The most predictable factor right now, he added, is that unpredictability will continue because the endgame and consequential impacts of the Russian invasion are still unknown.