TGIF takes on a new meaning as we close another lousy week in global markets in a bad month and bad year. There are precious few assets that have not lost money, and about the only asset class with positive returns for the year, energy, had a terrible week. We will take the opportunity over the next week to continue to adjust, including some tax loss selling. The market will likely continue to have sharp daily, weekly, and monthly swings in value. But some compelling opportunities are starting to emerge, particularly in fixed income. Here is a brief overview of what we see and how we are making adjustments.
Current YTD Returns: as of 9/22/2022
Index (Representative ETF)
YTD Total Return
NASDAQ Index: QQQ
S&P 500: SPY
Russell Small Cap Index: IWM
International Developed: EFA
Emerging Markets: EEM
U.S. Aggregate Bonds: AGG
*The above returns are represented by the Exchange Traded Fund for the index. Source: YCharts
And today is likely to make the returns worse. Energy (XLE +40.6%) and Utilities (XLU +3.6%), two of the smallest of 11 sectors in the S&P 500, are the only ones positive for the year. Even a supposed inflation safe haven like gold is negative for the year, with gold trading at a 52-week low today.
Our Response Plan
We thought we would get a rally out of the June 2022 lows, but what we expected fizzled out quickly with stronger action and words by Federal Reserve Chairman Jerome Powell. We will work to reduce exposure to the stock market and capture some tax losses in taxable accounts. Energy and energy-related stocks sold off but remain attractive because of the high dividend income (likely to go up) and concerns about supply. We are closely watching this sector which tends to have a lot of daily/weekly price movement. But the good news in the overwhelming bleak markets is in the fixed income sector. We think current bond market prices and yields are attractive.
The most striking number on the above chart is the historic negative YTD return on bonds. Stubborn inflation in June caused a big sell-off in both fixed income and stocks. Since June, the yield on the 2-year treasury has gone up from 3.1% to 4.2%, an increase of about 30%. While bond funds have lost money since June, the loss is slight compared to what happened in the year’s first six months. Why is this good news? We have not seen yields at these levels since 2007. The expected forward return on high-quality intermediate-term bonds is now 5.5% or greater. Since the Federal Reserve will likely have at least one more rate increase, short-term rates will go higher, but intermediate and long-term rates will likely be more stable. Put more simply; bond returns will likely turn positive with more stable values.
A central part of our risk control is reducing exposure to further losses by moving out of equities. We are reaching some of those risk control levels now. With the ability to earn income on cash and fixed income, it increases the incentive to be less risk-on.
Planning for Your Future
While we know markets will occasionally drop by large percentages and may take a long time to recover, we try to mitigate the consequences by reducing exposure to equities through a rules-based process. Doing so makes it possible to have shorter recovery periods and easier to stick with an investment process psychologically. Regardless of the process, there will be years of losses. When we work on your retirement and retirement income plans, we run scenarios with different return assumptions, including a significant (greater than 20%) loss over two years. Bad markets never come at a good time.
For those feeling more stress from experiencing negative returns, call us, and let’s update your planning projections. You may also schedule a meeting, phone call or video conference through our scheduling software by using your advisor’s link below.