I don’t know about everyone reading this, but I’m rooting for the change in seasons.
Cooler weather, changing colors, things just seem a little calmer in the fall. I believe many are also hoping for similar changes in the investing backdrop. What a crazy year thus far! The question is…will the global economic backdrop change that predictably like the weather?!?
The S&P 500 declined 9.3% in September in the steepest monthly decline since March 2020 as Covid-19 spread.1 Notching an almost 25% decline in nine months, the benchmark index suffered its third-worst performance at this point of a year since 1931.1 This year’s pullback outpaces steep declines seen during the 2008-2009 financial crisis and the 2020 pandemic, based on the drop in market value of the Bloomberg Global Bond Index and the MSCI All-Country World Stocks Index combined. 1 When it rains it pours! While this type of market environment is not comfortable, fortunately, our portfolios have carried an “umbrella” with our defensive tilt all year.
This year has been all about global central banks abrupt attempt to bring down inflation caused in large part by post covid stimulus. Interest rates up (bonds decreasing in value) and stocks going down has meant virtually no place to hide for investors as what were historically high valuations across assets are coming back down. Here is some further context to the current situations across markets and the global economy:
- Both hedge funds and mutual funds remain highly exposed to equities relative to the past decade. Similarly, household equity allocations stand at the 96th percentile since WWII, indicating further room to cut exposure should the macroeconomic environment continue to deteriorate. 1
- In 2021, a standard 30-year fixed mortgage in the US could be had for somewhere around 3%. Today that number is closer to 7%. Assuming a 20% down payment and the average 30-year mortgage rate; if you want to spend $2,500 a month, you can now buy a house that costs $476,425. For that same monthly payment, you could have purchased a $758,572 house in early 2021. 1 The silver lining of the rate shock is that most American homeowners are on fixed-rate mortgages. This is very different to other parts of the world such as the United Kingdom, Australia, and Canada.
- A 12-month Treasury now yields 4.0%, the most since 2001. 1 Yields on corporate debt have also increased substantially in recent months and are above average relative to the last 30 years.
- The trade-weighted dollar has appreciated 11% this year1, aided by its haven status and aggressive Fed hiking. Calls for a collapse in the USD thus far could not have been more wrong.
- After posting a massive gain in the first five months of the year, a Bloomberg commodity index has plunged more than 15% in the past four months. Oil prices have dropped notably on the outlook for diminished demand due to a slowing global economy. Longer term: significant supply side constraints continue to form. The U.S. has drained the strategic petroleum reserve and OPEC+ has recently reiterated a commitment to cut supply on a further fall in price.
Not a lot of sunshine to report, so when will the economic “leaves” begin to change?
In the months ahead the global economy will likely show signs of further deterioration as the lagged effect of higher interest rates works its way thought the system. In addition, the energy crisis in Europe will present a headwind to global growth. Below are some general points on our current positioning along with some critical considerations amidst all the noisy headlines:
- •We have held a high level of cash all year and thus avoided a sizable portion of the decline in stocks. In addition, we have remained mostly in shorter duration fixed income, so the rise in interest rates has been less destructive to our portfolios.
- Notable opportunity is starting to present itself in various corners of the bond market and we will be looking to take advantage of the highest yields in many years.
- The equity market is forward looking! Remember that a weakening real economy will not necessarily have proportionated impact on quality companies over the next one year and beyond.
- China could be on the verge of transitioning from strict policies towards polices that would promote growth. This could create various opportunities in select markets.
While we much prefer managing client portfolios during bull markets, the fact of the matter is this is not the current reality. Accepting things as they are versus how we want them is imperative to not getting caught in a “portfolio buzzsaw.” Our clients have been rewarded with our risk management first approach throughout the year. While we can’t say with any certainty that things will begin to pick up soon for investors, we trust our data-driven approach and are confident we’ll know when things stabilize. For the time being, while we wait, we encourage patience.
As always, we are available at any time to talk through any of this with you…please reach out!
Ryan A. Mumy, CFP®,
AIF® – Chief Investment Officer
Disclosures: The information provided in this paper is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Capital Investment Advisory Services, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of or reliance on the information. This information is subject to change and, although based on information that Capital Investment Advisory Services, LLC considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers. For investment related terms definitions, please visit: www.investopedia.com Past performance is no guarantee of future results. Advisory services through Capital Investment Advisory Services, LLC. Additional information about CIAS and its From ADV Part 2A are available on the SEC’s website at www.adviserinfo.sec.gov