There are those of us who like roller coasters, and others that don’t. Regardless of your persuasion, I think it’s safe to say that all of us are ready for the ride to end.
To say that the last 22 months in the market have felt like a roller coaster is probably the understatement of the year. On top of market volatility, there is political unrest, social unrest, and war in the Middle East. 2022 was a downright bad year, and the first ten months of 2023 have felt like at least five different, individual years.
Inflation was the buzzword of 2023
Inflation impacted everything from market performance to the price we pay for a carton of eggs. Inflation has colored the lens through which we have viewed this entire year. To tame inflation, the Federal Reserve has aggressively raised the Fed Funds rate 11 times over the last 22 months, from 0% to 5.25%. The Fed Funds effective rate is even higher at 5.33% (Source: FRED).
The good news is that we are now earning a decent rate of interest on our cash. The bad news is that mortgage rates peaked at over 8% recently. The high cost of borrowing is impacting everyone from individual homeowners to large tech companies that thrived for many years on cheap financing.
How has market volatility impacted my investment portfolio?
As a result of all of this, there was no place to hide.
Over the last 22 months:
- The S&P 500 is down 12.01%
- The tech-heavy NASDAQ is down 17.86%
- International stocks (MSCI EAFE) are down 16.44%
And thanks to the Fed’s aggressive rate-hiking campaign, even the normally conservative bond market (Bloomberg US Aggregate) is down 15.33% (Source: YCharts). After factoring in inflation that peaked at 9.1% in June of 2022–as measured by the US Consumer Price Index (CPI)–even cash wasn’t a safe bet. One dollar at the beginning of 2022 was worth more than one dollar at the end of 2022.
By design, at Bright Road Wealth Management, we do not make large changes to your portfolio frequently. Please don’t think for a moment that we aren’t constantly looking at and thinking about your investment portfolios. In many cases, consistent, ongoing rebalancing is the best recipe for successful portfolio returns in the long run. We tax-loss harvested at the end of last year to take some small advantage of the poor returns in the market.
Where the market has been?
There are some instances when wholesale change feels warranted. Personally, we have not experienced a market dislocation like we are now seeing since March of 2020. If you dare think back to that time, the Russians were in a fight with the Saudis over oil prices, and then a virus called COVID started to rear its ugly head.
In barely a month’s time, from the middle of February to the middle of March 2020, the S&P 500 dropped close to 34%. We fielded a ton of questions from worried clients then, very similar to the questions we are answering now. Believing in the long-term returns of the market, we executed a complete rebalance of client portfolios across the board. This meant we sold bonds (which had actually held their value) and bought beaten-down stocks. The decision proved prudent in the long run.
Where will the market go next?
As you know, we don’t believe in market timing. You might call us contrarian if nothing else. If I had a dollar for every article I’ve read lately that proclaimed something along the lines of “the 60/40 portfolio is dead,” I’d have a large charitable donation to make. After all, it is not rocket science to figure out that a stock and bond portfolio will do poorly when both stocks and bonds are down. Not to mention, do we like buying things on sale, or when they’re expensive?
The reality is that the negative returns in the bond market over the last 22 months have been the result of a mathematical equation. As rates go up, bond prices go down. Fortunately, the opposite is also true; as rates go down in the future, bond prices will go up. In the meantime, the current yield on bonds is higher than it has been in over a decade. If anyone wants to totally nerd out on bonds, we’re happy to talk about it one-on-one. Bottom line, everything that has punished the bond market over the last 22 months should make it resilient for the foreseeable future.
What should I expect as an investor?
As most of you are aware, the Federal Reserve announced today that they will hold rates steady, pending further economic data. Further, Fed Chairman Powell emphasized that “the committee is not thinking about rate cuts right now at all.”
Coupling this decision with all the global headwinds facing the equity (stock) markets, Bright Road Wealth Management will be reducing equity allocations across our portfolios in favor of increasing fixed-income (bond) exposure. Not only will this reduce the overall risk of portfolios, but it will also allocate more money to an area of the market that should have higher expected relative returns in the coming months and years.
As with all investing, there are no guarantees. However, we are confident this is a prudent move to make at this point in the market cycle. Please expect to see some changes in your portfolio over the coming weeks.
As always, if you have any questions, please reach out. We are always available to talk with you one-on-one. Our personal portfolios are invested exactly like your portfolios. We’ve all been on the roller coaster together. We are grateful for every one of you, and we appreciate the trust you have put in Bright Road Wealth Management.
Brian Pinkston, CFA, CFP®