What’s Ahead

• Nobody knows what will unfold next in today’s volatile global macroeconomic environment.
• Broad price targets and absolute predictions exist, but investors should focus on the few key factors they can control. 
• Structured Notes may improve a portfolio’s risk and return characteristics.

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Market forecasting is hard. Wall Street’s top strategists come and go as they seem to live and die by each macro projection. At the end of the year dozens of research shops and big banks will publish S&P 500 price predictions, making it their time to shine.

While U.S. stocks return around 10% on average each year, the range of annual performances is vast. What’s more, the risks and breakthroughs we collectively don’t see coming are usually the most impactful. 

But why all the sell side market calls and S&P 500 year-end predictions? It’s not them, it’s us, the investors. People love certainty, and seeing a future value assigned to the stock market offers market participants a sense of security.

To be fair, Wall Street produces deep and insightful research notes that help all of us navigate complex markets. The evidence is also clear: end-of-year S&P 500 price objectives are not worth all that much on their own. 

According to data from Keith Lerner at Truist, actual stock prices have differed substantially from forecasts when weighing all outlooks together since 2005. In fact, the actual/average gap appears to be growing in recent years. This isn’t exactly startling news, but more of a reality check. Strategists say one thing, but markets often do something totally different. 

Actual vs. Average S&P 500 Price Predictions: Glaring and Growing Yearly Gaps 

In light of this knowledge, everyday investors should look elsewhere for that valued sense of security. Structured Notes offered through Halo can be the ideal vehicle for weathering unexpected volatility that arises with little warning.

We all recall the sudden economic shock of COVID-19, but even more traditional macro turmoil can be unforeseen. The 2000 Dot-Com Bubble and Bust, the 2008 Great Financial Crisis, and Russia’s Invasion of Ukraine with the inflation surge in 2022 were just some of the market volatility catalysts that few experts had on their bingo cards.

Let’s explore why Structured Notes can be a tool to help everyday investors get through extended corrections, bear markets, and volatility. To put it bluntly, a properly constructed portfolio can offer more certainty than an S&P 500 price target. 

What Are Structured Notes?  

Structured Notes are an investment product, typically issued by a bank, designed to offer an investor market-linked growth potential and safety features similar to bonds. They provide investors with the potential to achieve growth and/or income with different levels of principal protection to match their risk tolerance.

Considered a hybrid vehicle, a Note combines a zero-coupon bond with a derivative package to construct a return/payoff profile. There’s a maturity date, protection level, and underlying asset, which determine the holder’s ultimate return.

One of the main reasons to include Structured Notes in a diversified portfolio is their potential for principal protection. While not all Notes are designed with full downside protection, many are structured so that investors preserve at least some of their initial investment, even if the market turns south. Thus, Principal Protected Notes (PPNs) can be an effective hedge if bullish strategist sentiment doesn’t play out in a given year. 

Structured Note Investment Strategies

Here’s how it works mechanically: Suppose a Note is linked to the performance of the S&P 500 Index. If the U.S. large-cap index declines, the Note’s bond component would ensure that the principal is returned, protecting the investor from losses. This is where a Note shines—even in the event of a moderate downturn (the average intrayear S&P 500 correction is about 13%), the investor may still receive a portion of the upside based on the index’s performance, thanks to the options package yield premium. 

Perhaps the real benefit isn’t so quantifiable, however. The peace of mind that comes with knowing that an investor’s nest egg will hold up if volatility increases is valuable. For clients concerned about risk management during volatility, Structured Notes offer a strategic way to hedge against unpredictable events while still participating in potential market gains. So, there are risk mitigation benefits along with positive behavioral reasons to include Notes. 

Tailor Made for Risk Management 

Are Structured Notes the elixir that delivers big upside with no downside? Of course not. Such investments don’t exist, and Halo works to ensure that all Notes’ risks are outlined. What makes Notes a weapon is that they are customizable and flexible to meet a range of investors’ risk tolerances and return objectives.

We’ve seen an increase in the use of Structured Notes to execute a particular market or industry outlook. Even more granular, single-company Notes are also put to work among active investors and financial advisors. 

For most individuals, Notes are generally owned to protect against market declines. They can be customized to feature extra downside protection in exchange for less upside exposure. We like to describe Structured Notes as the “Swiss Army Knife” of investment vehicles; if an advisor wants a Note with a short term maturity, that can be crafted just as a longer-duration Note can be procured on Halo’s competitive marketplace. U.S. investors may prefer the underlier to be the S&P 500, but other indexes (and even asset classes) are possible underliers. 

Bigger picture, Structured Notes allow for more flexibility than traditional stock or bond instruments, making them a versatile solution in the face of all those deterministic market predictions tossed around in the financial media. 

The Benefits of Diversification 

Another significant benefit of Notes is their potential to be uncorrelated to the broad market. Wall Street strategists might predict that the S&P 500 will perform a certain way or that interest rates will rise or fall, but the reality is that nobody knows how a handful of quarters will unfold. That’s when noncorrelated pieces of a portfolio can pay off or simply cushion the blow from an adverse market outcome. 

For instance, if equities decline sharply, a Structured Note linked to an asset like gold or even a currency might perform better, providing a buffer against losses in the rest of an allocation. An investor or advisor doesn’t have to stray from what they know best, though, as a PPN tied to the price moves of the S&P 500 can serve a similar purpose. 

Structured Notes for Boosting Portfolio Income 

Wall Street’s prognostications may miss the mark from time to time, but a retail investor’s nest egg can stay on track with a steady income stream. By using options and including a long-bond position, Notes generally sport bigger yields than typical high-dividend stocks or investment-grade bonds.  

Periodic coupons can be even larger after volatility has increased in the stock market, since option premiums are collected based on prevailing conditions. Buying inevitable pullbacks when fear spikes is a tough task for some people, but dipping a toe into volatile waters through Structured Notes may be an easier hurdle for risk-conscious investors. 

The Bottom Line: Hedge Market Uncertainty with Structured Notes 

There may be a tourist-friendly bean in downtown Chicago, but there isn’t a crystal ball at our headquarters in the Windy City. In the same vein, even the smartest men and women on Wall Street can’t tell us where stocks and bonds will head in the year ahead. Structured Notes offer a unique way to mitigate potential losses, customize risk exposure, and enhance yield—all while helping investors weather volatility when uncertainty rears its head.

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About the author

Chris Sullivan

Halo Investing

Chris Sullivan is a Regional Vice President at Halo, where he supports advisors in accessing protective investment solutions across California, Arizona, and Hawaii. With a B.A. from Rutgers University, Chris brings over 20 years of experience in the financial services industry, having worked in both traditional asset management and fintech. (edited) 

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 Please see our Halo Disclosure Page for important disclosures.

An investment in Structured Notes may not be suitable for all investors. These investments involve substantial risks. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

The views and opinions and/or analysis expressed are those of the author as of the date of preparation of this material and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Halo Investing or its affiliates, and may not be reflected in all the strategies and products that Halo Investing offers.

Content and any tools discussed are provided for educational and information purposes only. Halo Investing makes no investment recommendations and does not provide financial, tax, or legal advice. Any structured product or financial security discussed is for illustrative purposes only and are not intended to portray a recommendation to buy or sell a particular product or service.