Editor’s note: Christopher Baccella is a longtime columnist with Rethinking65. Read more of his articles here.
Christopher Baccella
What a year it’s been! When I wrote my last column in mid-March, the major market indices had started to show signs of weakness. At the time, the Nasdaq had officially sunk into correction territory (typically defined as a selloff of more than 10% but less than 20% from a recent peak), while the S&P 500 had not met that threshold.
Weeks later, the markets entered a full-blown bear market (a selloff of more than 20% from recent highs) following President Trump’s announcement of larger-than-expected tariff increases on “Liberation Day,” April 2. Then, within about three months, the markets recovered fully and hit new all-time highs as investors began to digest the news.
The Liberation Day bear market ranks as one of the shortest in U.S. history. The shortest bear market title still belongs to the “Covid Crash” that occurred in 2020. It lasted only 33 days, largely due to drastic actions taken by the Federal Reserve and trillions of dollars of stimulus provided by Congress.
Looking back to 1929, I could only find three bear markets that ended in 67 days or less. The average bear market results in a peak-to-trough decline of 35% and takes nearly a full year (289 days) to fully recover to its former peak.
As an advisor, it’s time to revisit your clients who became unnerved by the market’s volatility earlier this year. Consider using the current bull market as an opportunity to reassess their risk tolerance, spending needs, diversification and asset allocation.
For those clients who are overweight in equities, this may be an ideal time to revisit (or begin) their financial plan: The pain of the recent market volatility is still fresh in their minds, but they may have recovered most or all their losses.
In my last article, I discussed using stop-loss orders to help reduce risk by exiting a position that is selling off. Today’s higher market environment presents an opportunity to re-evaluate those stop-loss orders and potentially move them higher.
A Hypothetical Client Scenario
For example, let’s say Mr. and Mrs. Client purchased Company X stock a few years ago, and watched it rise to $100 per share. As the stock began to sell off earlier this year, heading into the $80s, the couple became concerned that it could go much, much lower. They agreed to enter a stop loss on half their position in Company X at $79, meaning their broker would automatically sell half their position if the stock sank to $79 a share. Fast forward to today, and Company X stock is now trading in the $90s.
The advisor has a few options:
Do nothing: Allow the stop-loss order to remain outstanding until it triggers or is cancelled. Please note that many GTC (good until canceled) orders expire after six months but can be easily renewed.
An outright sale: Exit some or all of Company X now. Diversify the proceeds into other stock(s), bond(s) or emergency cash reserves.
Raise the stop level: This is often referred to as a “trailing stop.” There are no hard-and-fast rules here. The entire stop order can be canceled and re-entered at a higher level (i.e., $87), or a new order can be entered to lock in the higher level while keeping the old order intact. In that case, the client would have one stop-loss order at $87, and another at $79.
If the shares continue to rally, Mr. Client and his advisor can continue to enter stop-losses at higher levels (i.e., $94, then $107, and so on) while simultaneously cancelling those at lower levels (i.e. the original stop loss at $79). This strategy can be customized based on the client’s needs, the specific stock, and even their capital gains budget.
Enter a limit sell order: Unlike a stop-loss order, which seeks to protect against a major selloff in a stock, a limit sell order seeks to sell at a minimum price. Here’s how that works using the example above:
With the stock now trading in the mid $90s, Mrs. Client agrees to take some money off the table—but only if the stock gets to $99. The advisor enters a limit sell at $99 for one-quarter of Mr. and Mrs. Client’s position. They can then go on vacation without having to constantly monitor the stock. Of course, there is no guarantee that the stock will ever hit that limit price, but these orders can be changed or canceled, as necessary.
What About Bond Yields?
The Federal Reserve has been in the news recently, as President Trump continues to demand it reduce interest rates to improve housing affordability and boost the economy. As a reminder, the Fed is tasked with a dual mandate: maximum employment and stable prices (low inflation).
However, some components of President Trump’s economic policy — such as tariffs and immigration controls — could be inflationary. Meanwhile, the U.S. unemployment rate has remained low at 4.1%, and the U.S. economy continues to add jobs, although the rate of job growth appears to have slowed recently.
As a result, The Fed has taken a somewhat more hawkish than some would prefer, as it takes a wait-and-see approach to further interest rate cuts. Meanwhile, from an investor’s standpoint, 10-year Treasury yields continue to be attractive, and are within 60 basis points (0.6%) of their all-time highs, as shown in the 5-year chart below.
A Caveat
Remember, every borrower needs a willing lender. During the COVID era, interest rates were cut to historic lows, which benefited borrowers to the detriment of many retirees and other investors seeking income. As a reminder (please see the chart above), five years ago, an investor in U.S. Treasurys may have earned just 0.5% annually, making it hard to fund their retirement.
Some of today’s borrowers are likely unhappy. But for income investors, yields are still relatively attractive, as the chart shows. Keep an eye on credit quality for your clients, especially on longer-dated bonds. And don’t be afraid to look at the longer end of the yield curve — if the client has ample liquidity.
As we all know, managing client assets is a lot more fun in a bull market. That said, we can differentiate ourselves as advisors by offering a long-term plan to our clients and helping them navigate volatile markets. Part of this is recognizing the psychological shift that your clients go through as they navigate from the accumulation years (focused on buy-and-hold and aggressive savings) to the distribution years (selling stocks, ETFs or mutual funds to fund their retirement and watching their life savings go up or down). Some clients will need more coaching during this transition phase. Incorporating stop loss and limit orders to your toolbox may help with this transition.
Christopher Baccella, CFA, is a senior wealth advisor withMariner. During a career spanning more than 25 years, he has provided investment and wealth management services to high-net-worth and institutional clients and served as a portfolio manager, investment research analyst, financial consultant and bond trader. He is a member of the CFA Institute and a past president of the CFA Society of Detroit. Chris can be reached at chris.baccella@mariner.com. Click here for disclosures.
