June 12, 2023 – An entire generation of investors came of age during a decade of relative market calm. After the bear market that lasted between October 2007 and March 2009, markets shrugged off early dips and a flash crash to continue their upward trajectory. By the end of 2019, the S&P 500 index had grown by a staggering 339.5%.¹ It was beginning to look like market shocks might be the stuff of ancient history. And, if they did happen, the dips were usually shallow or short-lived.

Financial professionals knew that a broader look told a different story. Since 1932, bear markets had occurred, on average, every 56 months, and the pain typically lasted for 9.6 months before a full recovery occurred.² The challenge was that some investors had grown accustomed to the goldilocks years of the 2010s—even those old enough to have lived through the dot-com bubble and the Great Recession.

Unwelcome Surprises

In January 2020, few people were ready for the devastating global pandemic that kicked off the new decade. Nor were they expecting the worldwide recession it spawned. To add to the suffering, the S&P 500 index lost more than a third of its value.³ While markets soon recovered, a string of reminders that investors should expect the unexpected followed.

By early 2021, Bank of America was declaring Bitcoin’s run-up as “the mother of all bubbles.”⁴ It wasn’t until the following year that their prediction proved to be correct. The cryptocurrency’s value plummeted in dramatic fashion. Bitcoin’s decline from peak to trough was the fifth largest on record.⁵ Meanwhile, consumers saw their buying power erode as inflation kicked into gear. December marked a 7% year-over-year increase in the Consumer Price Index—the largest December-to-December percentage change since 1981.⁶

Throughout 2022, stocks repeatedly moved in and out of bear market territory.⁷ At the same time, consumers dealt with the continued effects of rising inflation. The Consumer Price Index increased by another 6.5% by the end of the year.⁸ Borrowing rates followed a similar upward trajectory. The 30-year fixed mortgage rate, for example, nearly doubled to 6.42% by the end of December.⁹

Rising inflation continued into the first quarter of 2023. And new banking shocks roiled confidence and hinted at a possible recession. The runs on banks like Silicon Valley Bank and others, as well as the 2023 Credit Suisse bailout, added to the sense that the 2020s might have more unexpected jolts than the prior decade.

The Next Big Surprise

It is impossible to pinpoint the next big surprise, but scanning the environment yields a few possible suspects. We are inching up on a presidential election for one. Another area of possible concern is that the hybrid workforce has left many office buildings empty or underutilized. One study suggests New York City office real estate prices could remain 39% below their 2019 values ten years later.¹⁰ Or the war in Ukraine could spill over into other parts of the world. Another recent consideration—white-collar workers are eyeing recent advances in generative artificial intelligence like ChatGPT. Many may find themselves wondering what the new technology portends for the workforce of tomorrow.

Any of the above has the potential to shock markets or global economies. Or, as is often the case, the next big surprise might come from an event few have on their radars.

Preparing Clients

Financial professionals can help ease clients’ rattled nerves by setting realistic expectations and discussing a variety of investment options to help meet their goals. This almost certainly starts by reminding clients to stay on course. Surprises along the way are unavoidable. Investing for the long term and avoiding panic selling are prudent objectives.

Recent market turmoil can also serve as a jumping-off point to discuss the potential value of diversification. In addition to the traditional portfolio of 60% stocks and 40% bonds, some clients may have access to alternative investments that don’t trade on an exchange.

For those with longer investment horizons and lower liquidity needs, nontraded products may merit review—it’s a chance for clients to diversify beyond stocks and bonds and provide some insulation from the day-to-day sentiment that often drives traded markets.

Possible considerations when discussing nontraded alternatives with suitable investors:

1. What is the investment strategy and return potential?
2. While past performance is no guarantee of future results, it’s worth considering whether the investment is new or if it has a track record of performance across market cycles.
3. What about the manager? Have they navigated difficult markets, or are they new to the game?

Whether the client discussion ultimately focuses on the benefits of long-term investing, diversification, or the expectation that some surprises are inevitable, proactive communication is key to setting expectations and building trust.