Market Volatility: What Investor Relations Officers Need To Know

Market Volatility

Just a few months ago, the prevailing sentiment was that the economy is or will soon be in a recession. Economists like Mark Zandi, chief economist at Moody’s Analytics, recently said, “Historically, when you have high inflation, and the Fed is jacking up interest rates to quell inflation, that results in a downturn or recession.” Just like Mark predicted, over the last several months, the Fed proactively addressed inflation by raising interest rates while reducing its asset holdings with the goal of creating a “soft landing.” But, contrary to that kind of prediction, the results of these actions have been improved forecasts for both employment and retail sales, which are usually indicators of a healthy economy. So now, instead of facing an inevitable recession, we are dealing with market instability. This market volatility has created an uncertain vision of the short and long-term landscape for IROs. 

What IROs Need to Know

Investor relations teams must understand how their shareholder base can shift during volatile times. Kevin Herraiz, Senior Director at Q4, observes, “Some institutions will look to cut exposure to an entire sector or broader equities in general. Others will view these pullbacks as an opportunity to buy the dip and build a position. Meanwhile, hedge funds and fast money traders will become extremely active and cause trading volumes to spike and prices to swing dramatically. All these factors can significantly impact the mix of your shareholder base and your stock’s performance. A surveillance analyst can help identify these key buyers and sellers and help determine what is driving their decision-making. This will be critical in a team’s outreach strategy and targeting efforts.” 

Another side effect of market volatility is the potential for an activist investor to get involved. Kevin adds, “Indiscriminate selling across the markets opens the doors for activists to take a large position at attractive valuations. With the heightened trading volume and liquidity, it is easier for them to purchase shares quickly and under the radar.” Knowing how an activist investor can endanger a company’s ability to fulfill its own vision, IROs need to be aware of any activist positions amongst their shareholders. Using the right investor relations technology that can aggregate when activists are joining virtual events, visiting their IR website, and what their positions are in the market will allow investor relations teams to defend against these activities.

Market Volatility Implications for IR Teams

IR teams need to proactively prepare for a market that will create shifting influences on their companies’ actions. They must also consider how to communicate those actions to investors. Here are a few key considerations as you plan to navigate these challenges. 

Creating a response management team and documenting criteria for activating that team should be one of your first goals. IROs should understand scenarios that may already be underway. Working with internal partners in the Financial Planning & Analysis group is critical to establish operating assumptions for scenarios addressing various levels of impact. IR teams should also encourage their company to treat the economic environment as they would any other event with uncertain results.

Ensuring your company is adequately prepared to respond to market volatility will better position you to attract investors looking for safe havens. Assuming the data tells a good story, refer investors to prior periods of instability in which the company continued to operate well, demonstrating the company’s ability to weather a challenging macro environment. Point to how and why the company’s performance and immediate opportunities are somewhat impervious to economic conditions. If that is not applicable, then own where the challenges lie and develop the plans to address them. 

Finally, if you are a new company that doesn’t have the benefit of history to reference, highlight the experience the C-suite brings to bear in leading businesses through uncertain times. Be sure to take investors through the company’s plans to counter any opportunistic pressures as well. 

Initiating Communications of Impacts

As you begin to address the impacts of a volatile market, company messaging should focus on near-term visibility and actions the company is taking. John Nunziati, Associate Vice President of IR Professional Services, points out, “The first insight companies should provide is to clarify the problem and how long it could last.” This might include details on what the management team is doing to address the new challenges, such as implementing cost controls, infusing working capital, and exploring new customer bases. The key is to communicate the steps you are taking in areas you can control. Early communications may also address impacts or potential impacts, although this should be focused on highly likely outcomes.

What worked over the last few years is no longer working. When interest rates were near zero, investors were focused on top-line growth. Companies that could provide that were rewarded with a much higher valuation. Now, IROs should be prepared for more questions about profitability and fewer questions about revenue growth. Investors will likely focus more on defensive sectors such as healthcare, consumer staples, and utilities.

Continue Consistent Messaging 

Consistency in messaging is critical. Stick to your story. You have to be able to reiterate the compelling, credible investment thesis that drew investors to the company in the first place. 

There should be ongoing contingency planning for the possibility of situations changing. This plan should help investors understand why a less predictable market doesn’t jeopardize the company’s ability to achieve its goals. Even if not shared widely, explaining the company has activated a response management team focused on a cross-organizational response can alleviate uncertainty. 

Weathering the Storm of Market Volatility

With a cloudy future on the horizon, investor relations teams must be vigilant. In current dialogues with investors, companies should acknowledge the market changes. Sharing how the company is prepared to handle a shift in the economic landscape demonstrates transparency, awareness, agility, and the management team’s experience. Keeping investors close, ensuring the market is well-informed, and maintaining a consistent presence are essential. Solid investor relations practices will emphasize the company’s unique differentiation under challenging times. They will signal to investors that the company is in capable hands, inspiring confidence across your entire base of stakeholders.

For more information, check out more Q4 insights on Bridging the Market Volatility Gap.

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