Resiliency in a Messy Reality

Market Commentary | Q1 2023

“We have evolved as social creatures; that’s what we are, and our ability to cooperate is one of the largest factors in our success.”
– David Byrne 

From the vantage point of early April, spring may finally bring a respite from extreme and sometimes destructive winter weather. Living through these extreme weather patterns is stressful and has coincided with the financial market stress generated by rapidly rising interest rates. Whether a bank failure or downed power lines, extreme events can often bring a sense that we can no longer rely on predictable patterns. 

While individuals cannot control the weather or financial markets, we have collectively and creatively designed systems that can remain resilient when they are under stress. The power grid and the economy are both examples where temporary disruptions lead not necessarily to breakdown, but instead to adaptation and innovative action that can restore a sense of stability.

In the Market

The first quarter of 2023 brought some welcome growth, after a difficult year for markets and portfolios in 2022. Despite turbulence from banking headlines, the S&P 500, building on a late 2022 rally, gained +7.0% through the end of March. Stocks benefitted from optimism that global central banks, led by the Federal Reserve, might soon halt interest rate hikes – perhaps even setting the stage for rate cuts by the end of the year. 

The US bond market, following its worst year in decades, grew by +2.5%. Similar to stocks, bonds benefitted from an expectation that the current cycle of interest rate increases would come to an end. With US bonds now paying substantially higher income, they resume their role as a stabilizing force in portfolios that can be a ballast during times of market or banking volatility. 

Real estate saw the smallest gains among core asset classes, only growing by +1.8% as rising mortgage rates continue to apply pressure on the US housing market and limit the available supply for buyers. Meanwhile, the commercial real estate market faces a glut of office space with many companies still embracing a blend of remote and in-person work that arose as a result of the pandemic.1 The more interesting opportunities in real estate are in infrastructure – including cell towers and data centers – that underpin our growing digital economy. 

In the Moment

Systemic shocks can be unsettling when it isn’t obvious whether the system can adapt quickly enough. In the moment that Silicon Valley Bank was closed by the FDIC, the prognosis seemed dire. Several short weeks later, much of their business has been backstopped or transferred to other banks to ensure continuity for depositors and borrowers of the bank. We wrote recently about the success of the FDIC over nearly a century in acting as a stabilizing force in our banking system2; together with the Fed, they work to support and maintain the plumbing of a steadily growing economy.

As population, businesses, and investment have experienced significant growth in recent decades, the electrical grid has rapidly expanded to keep pace and power. Changing weather patterns have put new stresses on these energy systems, with summer and winter extremes leading to repeated power outages. Fire tornados, atmospheric rivers, bomb cyclones, and snowpocalypse events have emerged as part of our shared vocabulary to describe the weather of recent years. 

Despite PG&E’s ability to repair most problems on a fairly short timetable, the experience of a power outage is stressful. Computers go black, electric-based transit options cannot be charged, food goes bad at home and restaurants are forced to close. Much like these power failures, stock market volatility can be both logistically and psychologically disruptive, but the adaptations and relative stability that often emerge also serve as a reminder of the strength and resiliency of our collaboratively built large-scale systems.

Restoring a Sense of Agency

When storms arise in the market or nature, our experience is strongly affected by our personal efforts to build resiliency. Staying grounded can help us understand the resilience that already exists – our resources, financials plans and savings, friend networks, local services. It’s also worth reminding ourselves that negative predictions for the future are possibilities, not certainties. 

We expect that short-term turbulence will periodically arise, and we work with clients to implement an array of strategies to navigate these moments. The first step is ensuring the right amount of liquidity exists at the bank or in stable cash reserves within your portfolio. This buffer not only protects near-term cash flow, but it can also serve as an emotional buffer that helps an investor maintain their long-term allocation rather than reacting to temporary rallies or declines in the market. 

Regular and systematic rebalancing is another key strategy during times of market volatility. Our team rebalances portfolios as a way to systematically buy assets that have declined in price and offer long-term value, while also trimming assets that have grown in price and represent a larger portion of the portfolio than we intended. In 2022 that meant adding to stock positions at lower prices, while this year has seen us trim some of those recent gains and add to bond positions that provide ballast for bumps that may lay ahead.

Financial planning is another powerful way to restore a grounded sense of your long-term trajectory. When you have an understanding of your financial goals, your resources, and your current and future income it can be far easier to look beyond the alarmist headlines of the short-term. This type of planning can also support decisions to spend on upgrades such as solar installations and battery storage to increase personal resiliency in the face of future storms, intermittent outages, and potential rate increases.

Thriving Through Adaptation

Attempting to control or predict nature, financial markets, or the future is a recipe for disappointment. Instead, we must live within the systems that we’ve built, while constantly working to improve them and increase their adaptability as the landscape shifts. When we work with the messy reality we have, time and again, we adapt and coordinate in ways that create a path to success, even if it is a modified version of what we had imagined.

Diversification in investments, experimentation with energy use and needs, and embracing new technologies through portfolio allocations as well as personal adoption: these can all eliminate old limitations and create a new vista of possibilities. Knowing that financial markets will twist and turn in unexpected ways increases our resilience, and allows us to face changes with creativity.

We often describe our role with clients as that of “decision consultants.” As we look ahead to the next quarter and beyond, it is this collaboration with our clients that spans technical details, emotional needs, and the irrational and unexpected elements of life goals that make possible the process of determining the path forward. A plan that is both effective and appropriate can restore a sense of balance in an unpredictable world.

Resources
1 Office vacancy will increase by 55% by the end of the decade as hybrid and remote work push real estate to an ‘inflection point’ Fortune  
2 North Berkeley Blog:  Unraveling the Collapse of Silicon Valley Bank

Brian Kozel, CFP 

About Brian Kozel, CFP®

Brian Kozel is a Partner at North Berkeley Wealth Management. Brian helps clients feel confident as they navigate their financial journey.

Read more about Brian

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This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

By |2023-10-06T09:59:17-07:00April 7th, 2023|