By Scott Savage, CEO & Kevin Kelly, CFA, President.
Past as Prologue?
As advisors and professional investors, we hold vivid memories of the times when markets are volatile and bear markets ensue. So far, 2022 is going to be a year we won’t soon forget, joining 1987, 2000 through 2002, 2008 & 2009, and 2020, among others.
The primary culprit this year for lower bond and stock prices is an unexpected increase in short-term interest rates, reaching levels not seen in over fifteen years. The Federal Reserve that is responsible for the level of short-term rates has acted decisively, raising short term rates by 3.0% between March and September, attempting to halt and reverse the inflation rate from its current annual pace of 8%+. The Fed’s rate hikes flow directly to higher lending rates which tend to slow economic activity, thus increasing the risk of a recession.
All of this has been a significant headwind for stock and bond prices, giving the calendar year of 2022 its bear-market distinction.
Good Decisions vs. Good Predictions
Despite our opinions, we have never held ourselves out as predictors or market timers. However, we believe you rely on us to help make good decisions in a thoughtful and disciplined manner, in good markets and bad; decisions that involve re-balancing and making sure your long-term asset allocation targets are maintained. For your taxable accounts, we harvest losses where appropriate with the intention of deferring future taxes.
Last year at this time we made the decision to add a new alternative manager to our stable of asset managers. This decision has proved to be helpful thus far in 2022, adding some stability to the portfolio with our diversified alternatives fund (symbol: SRDAX) experiencing a nominal decline of 4% through September 30th, compared to much sharper drops of 25% for the MSCI ACWI and 15% for the Bloomberg U.S. Aggregate Bond Index. We continue to look for new managers and strategies that strive to improve the risk/reward profile of your portfolio.
The hard-to-find silver lining in such a difficult time is that going forward, the long-term expected rates of return on our capital market assumptions are higher than they were at the start of the year, due to more attractive price valuations as of September 30, 2022. Does this mean we are close to a bottom? That is never knowable in advance. But if history repeats, we want to make sure that your investments are well-positioned to benefit from rising asset prices, if and whenever that may come.
We remind ourselves, knowing that past performance is not indicative of future returns, that periods following past bear markets have offered very meaningful market returns, the historical “reward” in the risk reward trade-off:
Source: Russell Indexes, Jan 1979 – Sep 2022.
We can only speculate on the short-term vagaries of the markets, and in the meantime, we will keep making what we believe are the best decisions for you!
Important Disclosure Information:
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.