Dear Friends,
We hope you and your families enjoyed a wonderful 4th of July. Unfortunately, investors haven’t had much to celebrate recently as we just lived through the worst first half in financial markets in the last fifty years. Through June 30th, the S&P 500 was down more than 20% and the US bond market was down 10%. Talk about a double whammy! A number of factors came together to cause these results, including:
- Valuations in both stocks and bonds were extraordinarily high after three years of excellent returns and near zero interest rates. Prices were overdue for a correction.
- Interest rates began going up even before the Fed took any action….and now the Fed is aggressively raising rates. Higher rates lead to lower valuations for both stocks and bonds.
- Inflation has reached 8-9% due to a combination of pandemic related supply chain bottlenecks and strong demand for goods and services facilitated by excessive liquidity provided by both fiscal and monetary policies. Higher demand plus lower supply equals higher prices.
- The war in Ukraine ended any chance of inflation being transitory as it has triggered price shocks in both the energy and agricultural sectors.
- Recession risk is now on the table and some believe we are already in recession. At a minimum, we’re entering into an economic slowdown.
What’s the Outlook?
The economy is softening and will probably continue to do so as inflation dampens demand and the Fed raises rates through the summer. Odds are at least 50% that we’re in a recession or will have one …although it is still possible that it could be short and shallow; that remains to be seen. Recession may be the price we have to pay to get inflation under control. Although the stock market is already down more than 20% year to date, we cannot dismiss the possibility that we see another leg down before we hit the bottom. Keep in mind that the declines we have seen this year are not nearly as steep as the declines we experienced in both 2000-2001 and 2007-2009.
What to Do?
Here are a few things to keep in mind:
- Bear markets are painful but they do not last indefinitely. Historically, bear markets have averaged 15-20 months in duration while bull markets have lasted 6 years on average.
- Panic is not a strategy. Resist the temptation to sell when prices decline. Historically, stock market returns are above average in the three years following a bear market. Caveat: you have to be in the market in order to benefit.
- Don’t try to time the market or catch the bottom (good luck on that). For investment success, time in the market beats timing the market.
Our approach during this difficult period has been to do our best to mitigate the damage by staying diversified and by shifting to more defensive sectors in both the stock and bond markets. Plus, we have avoided speculative assets such as meme stocks, crypto and NFT’s. Furthermore, we are determined to position our clients’ portfolios so that they will take full advantage when the eventual turnaround comes about.
Please let us know if you have any questions or if we can do anything for you. We appreciate your support and encouragement.
Matt and Andrew