Macro

S&P 500 Dips 1% Amid Middle East Tensions, Inflation; Portfolio Tips

Middle East tensions and inflation spike rattle markets, driving S&P 500 down and volatility up; investors urged to focus on quality.

By Barry Stearns

4/15, 15:42 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
article-main-img

Key Takeaway

  • S&P 500 fell over 1% amid Middle East tensions and sticky inflation, with the CBOE Volatility Index jumping 10% to 19.17.
  • Investors advised to rebalance portfolios away from expensive tech stocks towards industrials, materials, energy, and healthcare.
  • With bond yields rising, now is seen as an opportunity to secure higher yields in fixed income, favoring bonds with a duration of three to seven years.

Market Turbulence Intensifies

The S&P 500 experienced a significant drop, falling more than 1% on Monday afternoon, marking a continuation of its worst week since last October. The CBOE Volatility Index, a measure of market fear, surged over 10% to 19.17. This heightened volatility comes amid escalating tensions in the Middle East, with Iran launching drones and missiles at Israel, exacerbating investor concerns. The situation has led to a spike in oil prices and persistent inflation, contributing to the market's unease.

Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, highlighted the potential for increased capital-market volatility due to the conflict. He advises investors to focus on quality in their portfolio allocations, suggesting a cautious approach in these uncertain times.

Portfolio Strategy Amidst Volatility

Investors are advised to rebalance their portfolios, especially after last year's significant stock run-up and this year's continued strength. This may involve reducing exposure to equities, particularly in sectors like Information Technology and Communications Services, which appear overvalued on a price-to-earnings basis. Paul Christopher recommends reallocating into sectors such as industrials, materials, energy, and health care, which may offer more stability and value.

Selective selling and tax-loss harvesting are also recommended strategies. By selling underperforming positions in taxable accounts, investors can offset realized gains and potentially reduce their tax liability. However, it's crucial to be mindful of the wash-sale rule to ensure the ability to deduct these losses.

Income Opportunities in Bonds

With bond yields inversely related to prices, the recent rise in yields presents an opportunity for investors to secure higher income from fixed income investments. The anticipation of Federal Reserve rate cuts in 2024 has been tempered by recent inflation reports, but there's still a 71% likelihood of easing by September, according to CME Group’s FedWatch Tool. Gargi Pal Chaudhuri of BlackRock suggests that the current environment may offer the last best chance to extend bond duration, favoring investments in fixed income with a duration of three to seven years.

Street Views

  • Paul Christopher, Wells Fargo Investment Institute (Neutral on the market):

    "Our view is that this latest escalation poses greater risks for potential future capital-market volatility."

  • Gargi Pal Chaudhuri, BlackRock (Bullish on fixed income with duration of three to seven years):

    "The recent back up in rates is probably the last best opportunity to extend duration."