At the beginning of the year, it was the Federal Reserve’s viewpoint that inflation was going to come and go, and there may not be a need to increase the fed funds rate. The phrase “Inflation is transitory” was born and now will live in infamy… and not for good reason.
Since these remarks in January, the Federal Reserve has increased short-term interest rates at one of the fastest and sharpest clips we've ever seen. This spike in rates has had many economic consequences, such as increased borrowing costs, equities selling off, and a possible housing recession, just to name a few.
As it stands today (9/23/22), equity indexes are nearing their June lows, which puts most indexes down 25-35% on the year, interest rates are closing in on decade highs, and it feels as though we are nearing peak economic pessimism. As rates continue to search for stability, it is impossible to accurately predict what will happen in the near term.
The Good News
A lot of damage has already been done, and bond yields are materially higher. We finally have competitive yields. The 1-year treasury is yielding 4.1%, which is its highest level since 2001! Savers and fixed-income investors may finally be compensated for investing their money into bonds. It’s been quite some time since we’ve been able to say that.
From an equity perspective, times like this are to be expected. As prices decrease, future expected returns increase. Historically speaking, equity investors have been greatly compensated for holding and adding to equities when they’ve reached these technical levels.
To illustrate this, I’ve included a chart below by Brian Sozzi of Yahoo Finance, which shows S&P 500 returns after the index falls 20%. As you can see, 1, 2, and 3 years post-decline, the numbers typically look pretty good.
Going Forward
Doing a postmortem on our positioning, we were on the conservative side of things heading into 2022. We rebalanced and took our equity weighting up slightly in mid-June (during the last low) and shortened our duration on the bond side of things. Looking forward, if markets break through June lows to the downside and rates continue to creep up, we most likely will rebalance and add a bit more to equity and longer-duration bonds. Buying low isn’t a lot of fun but, over time, has proven to be beneficial.
From here, our advice is to do your best to ignore the noise. If you haven’t already, you will see “apocalyptic headlines” calling for the end of financial markets as we know them. All of the doomsayers will make very convincing arguments for why "this time is different." Despite the fact that it has never been…
Focus on the big picture. Every bear market puts previous beliefs to the test, and this one will be no exception. Stick to your plan, and don’t hesitate to reach out if you or anyone you know has any questions. We are here for you and take that commitment very seriously.
Have a great weekend!
Thanks,
Frank
Retirement Capital Advisors
800 Battery Ave SE
The Battery, Suite 100
Atlanta, GA 30339
Office: 412-722-3795
frank@retire-me.com
Securities and Advisory Services offered through Commonwealth Financial Network®, member FINRA/ SIPC, a Registered Investment Adviser.
This writing is for the clients and associates of Retirement Capital Advisors only. It is not intended as specific investment advice. You should talk to your own financial advisor about specific investments. No guarantees are implied or given, and investing involves risk of loss of money. All statements made herein are forward-looking and assumptive and do not guarantee any outcome.
All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.