Update on the Markets:
| Index | 3rd Quarter 2022 | Full Year 2022 |
|---|---|---|
| S & P 500 (Large US Stocks) | (4.88%) | (23.87%) |
| Russell 2000 (Small US Stocks) | (2.19%) | (25.10%) |
| FTSE All-World ex-US (International Stocks) | (9.65%) | (25.86%) |
| Barclays US Aggregate (Bonds) | (4.75%) | (14.61%) |
October 2022
Key takeaways
► Another dismal quarter
► 4th quarter may not be better
► Bonds looking better
► Damage to balanced portfolios
Another dismal quarter
The last day of the third quarter ended on a sour note, cementing another down quarter for stocks, bonds, and most everything else. Stocks and bonds are now down three quarters in a row. It’s been a slow grind down. The S & P 500 index of large US companies is down almost 24% for the year. The yield on the US 10-year Treasury ended up at 3.83% after starting the year at 1.51%. One bright spot (except for energy investors) was the drop in oil prices. Brent crude fell 23% in the third quarter. Many drivers were relieved to pay around $4/gallon of gasoline vs. $5/gallon earlier in the year.
Worries Persist
Many of the causes of the market decline look to continue into the 4th quarter. Stubborn inflation and the Fed’s resolve to fight it remain. We will see how corporate earnings hold up under intense inflationary pressure. The conflict between Russia and Ukraine continues as well. However, the US consumer continues to spend. And certainty regarding the outcome of the mid-term elections will finally arrive on November 8. Most investors are hoping for a divided government. They hope that Republicans take the House at the very least.
The yield on the 2-year Treasury passes 4.00%
Yields on bonds are starting to look attractive. 4.00% may not look great when inflation is more than double, but it sure beats the sub-2.00% yields we’ve witnessed lately, even negative yields in Europe. Meager yields were one justification for investors to put money into risky assets, like stocks, often called “TINA”: There Is No Alternative. Many stocks in the S & P 500 yielded more than the 10-year US Treasury. Today the S & P 500 index yield is under 1.90%, according to YCharts.com, while the 10-year US Treasury ended the quarter at 3.83%. And the Fed signaled that raising rates is not done, so bond yields are sure to go up. As a result, keeping some money in short bonds and CDs is becoming more popular.
Does a balanced portfolio still work?
For decades many investment managers designed portfolios using a mix of stocks and bonds, often called a 60/40 portfolio: 60% stocks + 40% bonds. The mix offered an effective combination of stocks for long-term growth and bonds for income. Stocks’ superior long-term performance came at the price of volatility and occasionally painful drops. Bonds returned less but tampered swings in the portfolio and offered steady income. It is a comfortable compromise for most investors. Most folks cannot handle the stress of an all-equity portfolio.
However, several developments in the stock and bond markets resulted in difficulties for balanced portfolios. The long bull market in bonds that started in 1982 caused yields to ratchet down for several decades. The yield on benchmark US Treasuries reached a record high of 15.32% in September 1981 and a record low of 0.62% in July 2020. Bonds continued to offer stability but very little income – hurting overall portfolio performance. And stocks suffered dramatic pullbacks in 1987, 2000-2002, 2007-2008, and 2020.
Performance of Vanguard Balanced Fund (VBIAX) in 2022
Over time balanced portfolios delivered less income, less stability, and lower total return. So financial planners are looking to add other assets to the mix – often called “alternative” assets – to add return, if not stability. Today, inflation – the worst since the 1970s – has wreaked havoc on stocks and bonds. It’s very unusual for bonds to have a negative year; they’re down over 14% year-to-date. As for stocks this year…well, you know. And despite the carnage this year, many analysts think stocks and bonds remain expensive, meaning performance in the future will be muted.
Other asset classes may offer protection from inflation and be a source of return. They include real estate, commodities, private equity, private credit, and even fine art and wine.
Please let me know if you have any questions or concerns.
Sincerely,
Henry
Henry Gorecki, CFP®
HG Wealth Management LLC
401 N Michigan Ave, Suite 1200
Chicago, IL 60611
312-723-5116
