May Market Commentary
Navigating the Fog
Financial markets are often difficult to navigate. The first five months of 2022 have been especially treacherous. Through the market close on May 19th, all of the major equity indices have decreased by more than 14%. The S&P 500 is down 17.7%, the Russell 2000 index is in bear market territory, decreasing by 20.5% year-to-date. The MSCI EAFE is 14.9% lower than it was to start the year and the MSCI Emerging Market index has lost 17.1% of its value since the year began.
Even the Bloomberg US Agg Bond index is down 9.5%. To put that in perspective, the U.S. bond market has had positive returns in all but four years since 1976. According to Edward McQuarrie, an emeritus professor of business at Santa Clara University who studies asset returns over centuries, the broad bond market has performed worse so far in 2022 than in any complete year since 1792, except one. That year happened to be 1842, when a deep depression was searching for its bottom. When viewed through that context, it is easy to see why investors have been feeling completely frustrated with the financial markets this year.
While the natural and common human reaction is to want to sell during such a challenging time, that tendency is rarely the right one. As the late Jack Bogle said, “your emotions will defeat you totally” if you try to sell your holdings to avoid losses and get back in afterwards.
The issue lies in the fact that to properly time the market, you have to be right twice. You not only have to sell before the downturn but also must buy ahead of the upswing. Getting one of these decisions correct is extremely difficult. Timing both accurately is borderline impossible. Many investors say they plan to sell now and buy back in “when the market stabilizes.”
Internally, hearing this line always causes us to smile a bit as anyone waiting for the market to give them a “green light, all clear signal” may be waiting for a very long time. Seasoned investors know that, invariably, by the time things look better, the market has already recovered…and then some. If an investor decided to sell and missed the resulting upswing, they just made reaching their financial goals that much more difficult.
Because of the degree of difficulty in properly executing market timing, and the resulting damage that could occur if/when not executed properly, we believe market timing is something that you should avoid. Investors would be better served spending time on their favorite hobbies or learning how to play chess or enjoying some sort of physical activity. That is, spend your time doing something enjoyable, within your control that leads to a tangible benefit as opposed to spending time on something out of your control that is not very pleasant and has no tangible benefit or causes harm to your overall wealth (and possibly health).
Investors would be wise to follow the aforementioned Bogle’s advice, “Stay the course, don’t let these changes in the market, even the big ones [like the financial crisis]…change your mind. And never, never, never be in or out of the market. Always be in at a certain level.”
This is not to say that, while staying invested, no adjustments can be made. For instance, in our client portfolios, we have made a number of adjustments over the past several months. Short-term inflation protected bonds were added to our recommended bond portfolios. We also added floating rate securities. These shifts were made with the intention of taking advantage of the rising interest rate environment while also capitalizing on some of the rising inflationary expectations.
The above realignments were made at the expense of reducing traditional, core fixed income. The duration of our bond portfolios was also shortened in order to minimize the price decline the bond portfolio would incur from the rising interest environment. Further, we shifted towards value and away from growth and added private investments in portfolios where it made sense and clients were comfortable with a measure of illiquidity. Lastly, the clients that are comfortable with alternative asset classes now have exposure to real assets and/or commodities in our alternative bucket.
While 2022 has gotten off to an inauspicious start, we believe that the second half of the year will go more smoothly than the first half of the year. In mid-term election years, uncertainty has a tendency of dissipating in the back half of the year. Further, a good portion of the downside already appears to be captured in the relative valuations of many securities. Companies with high-quality, consistent earnings and stable to increasing dividends tend to be rewarded in environments fraught with uncertainty. We think now remains a good time to be overweight high-quality companies that fit that description.
Written by Charles Verruggio, Chief Investment Officer