We have experienced extreme stock and bond market volatility so far this year, due primarily to inflation and central bank interest rate increases. Some days it seems the magnitude of the stock market declines and gains are more like a “shock market” than a stock market.
It is easy to become genuinely concerned about the balances in our portfolios, especially if you are retired or approaching retirement. This is understandable. Nolan and I look at the fundaments and we see reasons for concern, but we also see reasons for optimism.
Markets could be approaching the bottom in the next couple of months and may turn to a growth phase again. Why do we think this? Central bankers will be slowing and stopping interest rate increases in the next few months. Inflation will moderate and the supply chain will improve. These events should help markets to return to a positive outlook. We want to stress that this will take time. We ask for your patience and understanding.
Here are two paragraphs from a recent commentary by Jurrien Timmer, Director of Global Macro, Fidelity Investments that offer some interesting insights into what lies ahead for investors.
- The only asset class up on the year is cash. Someone might ask, why not just be in cash? You are not compounding returns when you are on cash. It is over 4%, but when you are compounding returns for your clients, you need to be diversified via other asset classes.
- A diversified portfolio of long-duration assets remains the long-term key. If we look at the 60/40 portfolio – which we may not exactly be in – most of ours are related to this structure – neither the 60 (equities) nor the 40 (bonds) worked this year. Eventually, one of them will. It has been an unusual period.
WHAT’S AHEAD?
No one knows for certain how things will unfold over the next five years, but Jurrien Timmer, has an interesting take on what may happen: My sense is that this correlation will flip back to negative – bonds and equities to become negative correlated. So don’t sell your bonds. The 40 side is looking attractive now, even if the 60 side isn’t out of the woods.
Bonds have been a significant underperformer this year and they have adversely affected the performance of our balanced portfolios. This is the second time in three months that we have quoted bond managers and economists who have a positive take on the prospects for bonds in the next two years. An improvement in bond pricing will shore up the performance of our balanced portfolios and provide growth to recover our recent declines.
