Cyclical Markets and How to Manage Them

Diversification, flexibility, and planning are the best tools to face the possible risks of investing in global markets. However, recent events, such as inflation due to the COVID-19 pandemic and the conflict between Russia and Ukraine, are still a cause for concern.

“Risk is normal, and markets have their ups and downs. The important thing is to align your goals with strategies based on your financial plan. The risks must be integrated in the plan because we know that markets, cyclical in nature, are not going to return 20% every year," stated Jaime A. Toro Lavergne, President of Popular Securities, a local affiliate of Popular, Inc. that offers brokerage firm services and investment advice.

Toro explained that inflation and the Russia-Ukraine conflict are the biggest concerns for investment portfolio analysts and managers.

The demand for products and services slowed down in 2020 due to the shutdowns brought on by the pandemic. Once measures began to normalize, the demand for products increased faster than the supply, leading to an increase in the price of products and services.

Now, the war in Ukraine has exacerbated the inflation since the country is one of the main producers of food consumption in Europe. This has forced the affected countries to buy food from other suppliers, which Toro argued, "has disrupted the distribution chain, causing an additional increase in prices."

The conflict in Ukraine has also impacted the energy sector: several countries, including the United States, have halted their oil, natural gas, and coal imports from Russia, driving up fuel prices.

In addition, the sanctions imposed on Russia by the governments of different nations have forced the private sector to stop investing in the Russian markets.

Toro stated that the investment accounts in Popular Securities are managed through the company Fidelity Investments. “When the sanctions were announced, they (Fidelity) sent a statement notifying that they would no longer trade or work with Russian securities and that everything belonging to people from that country would be frozen. However, this had no impact on our operations because we didn't have any clients to whom the sanctions would have applied or who held Russian securities,” he explained.

Regarding inflation, Toro recalled that the United States Federal Reserve (also known as the Fed) increased the interest rates last March by a quarter of a percentage point (0.25 percentage points) —the first increase in three years. It is very likely that this measure, which is intended to control inflation, will be adopted again, as the Fed plans to increase rates about six to eight more times this year. “Bond values have incorporated the expectation that interests will rise. Therefore, their prices have decreased,” Toro said.

What should you do when faced with market volatility?

Investors are advised to remain calm, diversify their investment portfolios, follow the plan they have outlined, and have the flexibility to adjust to the market's reality, if necessary.

"You have to be patient and let the strategies work", the executive recommended. “Many investors freak out when they see stocks continue to decline in value and get rid of their investments just before they start to recover,” he continued.

He specified that strategies should be medium- or long-term in order to bear fruit in a volatile market. As an example, he said that the Nasdaq Technology Sector Index was down 21% so far this year but that in the last three years, it has shown a cumulative return of 55.20%.

A good option to protect your portfolio from market fluctuations is to diversify your investments, placing your stakes not only in United States stock but also in foreign stock, government bonds, mutual funds, and commodities. Since the values of all these assets do not usually increase or decrease at the same time, the growth in some helps mitigate the reduction in others. “Diversification is essential because, by combining assets that don't necessarily move in the same direction, it lowers the volatility of your entire portfolio,” Toro pointed out.

Regarding flexibility, the executive mentioned that this entails having liquidity and not investing the money the client expects to use this year in the stock market. "Most of our portfolios are liquid, which means that if we sell certain assets today, the client will have their money in one to three days," Toro claimed.

This is why it is important to diversify, have flexibility, and remain calm, especially since Puerto Rican investors are not exempt from what is happening at a global scale.

Future Outlook

Toro assured that the yield of the fixed-income market (bonds) is expected to recede a little more for the remainder of this year before starting to recover in 2023 or 2024, due to the impact of the expected increases in the Fed interest rates. Meanwhile, he said it is expected that "the stock market won't perform the way it has over the last 10 years, but it is not going to have a significant long-term setback."

He reminds Popular Securities clients that they can use the Wealthscape Investor ^SM tool¹ to keep track of their investment portfolios, which may be accessed through Mi Banco Online or www.wealthscapeinvestor.com. This tool allows customers to view their balances and transactions, as well as their account statements, security confirmations, and the updated prices of their stocks and bonds when the market is open.