Q2 2022:
-18.75% – U.S. momentum stocks
-11.68% & -10.39% – Emerging markets (small & profit) stocks
-13.86% – International profitability stocks
-16.11% – U.S. large stocks                                                   -14.34% – Global high yield bonds
-12.88% & -21.32% – U.S. small (value & profit) stocks     -4.54% – CA municipal bonds
-13.93% – U.S. Hi Relative Profitability                               -5.50% – Core bonds
YTD 2022:
-24.73% – U.S. momentum stocks
-15.60% & -24.70% – Emerging markets (small & profit) stocks
-20.18% – International profitability stocks
-19.98% – U.S. large stocks                                                   -21.18% – Global high yield bonds
-12.98% & -31.50% – U.S. small (value & profit) stocks     -11.29% – CA municipal bonds
-17.68% – U.S. Hi Relative Profitability                               -10.11% – Core bonds
This was one of the worst starts to the year on record for stocks and bonds. Bonds, in particular, are experiencing one of their worst periods ever. Stocks, while down significantly in the current period, have experienced much greater drops in past periods.
We’ve been clawing our way out of a stock market low set on 6/16/22 (a value last visited in late December of 2020) with the last 4 trading days all being up, and today (7/7/22) being the most positive of the 4.
This is on top of interest rates and oil (and other commodity) prices pulling back somewhat in conjunction with signs the economy is slowing a bit. We’re pumping oil at the highest rate in the U.S. since before the pandemic. Favorable weather is likely to turn out bumper crops to somewhat backfill for the deficit caused by the Russian invasion of Ukraine.
All these points together mean The Fed may not have to go crazy on short-term interest rate increases as liquidity naturally drains from the system and commodity prices look to at least be stable if not potentially heading lower. Commodity prices mostly dropped last quarter in part because U.S. consumers are switching from buying products to spending money on services like travel and leisure.
Employment, however, is still strong and consumer balance sheets are still relatively solid (most especially for the bottom 25% of earners) so we may work our way through this inflationary period without too much more drama, although I imagine some is yet to come.
Markets started softening for our most volatile stock and bond funds back in September of 2021. Challenging stock market periods, on average, last about 10 months (broader indexes really started dropping closer to the start of this year) but of course they can go on much longer. In our estimation we’re not in a worse than average situation, albeit an unusual one, but we’re prepared to change our view depending on how things look over the next several weeks.
All that said, we’ve been in a pause on putting large cash deposits in markets for several weeks. However, given the way markets are trading at the moment we’re inclined to put some cash to work soon because money needs to be working to generate return over the long run. We’re doing chunks as little as 1/10th of current cash but sometimes more depending on the type of money and the client’s circumstances.
We’ve been studying potential adjustments to portfolios, and certain assets, and will be doing rebalancing and tax loss harvesting in the coming weeks or maybe months.
We’ve been buried in reading about all manner of current conditions as well as studying past periods to remind ourselves that not only do these periods not last forever, but being out of markets for too long, when things look bad, can cause very meaningful long-term damage to wealth. Markets are forward looking and usually turn before the general consensus does.
We’ve sat in on a few bond portfolio manager calls, and while they’ve taken it on the chin for a bit, they have found opportunity in the volatility and seem to be positioned well for when bond markets turn.
As always, we appreciate the trust you put in us to manage your investments. We are always available for a conversation should questions arise or you simply desire to connect with us for a few minutes to just say hello.
Sincerely,
Erik S. Wolfers, MBA, CFP®
