BY: RYAN P. JOHNSON, CFA, CFP® - Managing DIRECTOR OF Investments
While we are in the midst of the second stock bear market of the past 3 years, market losses are much less frequent than gains. This does not make living through the bear market any easier, but our planning projections have been conservative, and portfolios were structured to lessen “sequence risk”. This is the risk of a major stock market decline right around the time withdrawals are first needed from your investments. When faced with this challenge, traditional responses are work longer, spend less, or possibly reduce risk at the wrong time. Our approach to building portfolios for retirement, for example, is to keep approximately 5 years of cash needs out of the stock market. This way, the stock portion of the portfolio can experience ups and downs without derailing your retirement plans.
Over the past 50 years, the S&P 500 has posted a calendar year loss 11 times. Returns in the 0-20% range have occurred 20 times and the remaining 19 years have seen returns higher than 20%. In September 2021, which was inside a calendar year that saw stocks gain every month, we wrote this in our Market Insights: “Working with a trusted financial advisor can help you see extremes in a historical context and work through tough times when emotions take over. Starting with a financial plan that fully integrates investments and taxes can help you grow, protect, and save your assets. Sticking with the plan in tough times and overcoming emotions is paramount to long-term success.”
Stock and bond markets continue to move on Fed commentary and speculation of what their next moves might be. As of this writing, it seems all but certain that the Federal Reserve will raise short-term interest rates by 0.75% again on November 2nd, to a range of 3.75-4.00%. This will continue the Fed’s fastest rate hike cycle in the past 40 years. Last week’s reports on producer (PPI) and consumer (CPI) inflation were both over 8%, which is well above the Fed’s comfort zone. While we feel the risk of a Fed policy error is high, the Fed currently feels doing too little is worse than raising rates too much. In this rising rate environment, our clients’ portfolios have benefited from having shorter average maturities than the Bloomberg U.S. Aggregate Bond Index. This, along with often having alternative funds that have also held their value much better than this bond market index, have helped preserve capital far better than this year’s roughly 16% bond market decline.
Stock and bond markets would welcome falling inflation figures and there are some signs that inflation could be decelerating. While headline PPI and CPI reports remain high, the year-over-year figures have been coming down since June. The Drewry World Container Index (for ocean freight) is down 65% from a year ago. The price of oil is now only slightly higher than a year ago when it reached ~$85 per barrel in October 2021. Used car prices, according to Manheim, are down 0.1% year-over-year as of September. While housing prices are still much higher than a year ago, the average selling price in the U.S. has been fairly flat for the past 3 months and could start to fall due to high mortgage rates.
“In the midst of every crisis, lies great opportunity” – Albert Einstein
Focusing on what you can control in this environment, we suggest the following ideas depending on your personal situation. With the strong dollar, purchases in foreign countries and purchases of foreign imports are much cheaper than they recently have been. Buying Series I Savings Bonds before the end of October will still capture relatively high interest rates (discussed further in our May 20, 2022 article titled Cash Savings: Options to Meet Your Goals). Particularly for individuals who itemize expenses on their tax returns, it may not make sense to pay extra on your mortgage but instead buy bonds that have higher interest rates. As we have been saying for months, it is beneficial to pay attention to the return you are earning on cash. Lastly, we feel sentiment towards stocks is so low that, historically speaking, forward returns could be well above average when looking out a year or more.
We are hosting a special virtual event called Achieving Balance: Managing Stress During Your Career and Throughout Retirement, with keynote speaker Dr. Travis Parry. This live webinar will be on Tuesday, October 25, from 6–7 pm ET. Please register here and send the link to someone you know who may be interested: https://mybuckingham.com/events/parry.
We are here to help you manage through the tough times and we thank you for your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Managing Director of Investments