As I write this on the morning after Election Day, the results are undetermined, as suspected. I think all of us want to make sure the final tally is correct, but I hope that the outcomes are determined soon. The longer the delay, the greater opportunity for folks to question the validity of the results, which in turn could lead to even more stock market volatility. We all would like to avoid that.
As I’ve written before, this year has been especially difficult, as seemingly no investment strategy has worked. Both S&P 500 index of US stocks and the Barclays Aggregate Bond index are down more than 15% for 2022 as of November 8, and even gold is down this year. Within the stock market, only the energy (oil) sector has positive returns for the year. The other 10 sectors are all down, with communications services down an amazing 41%. Ordinarily, investors diversify their portfolios across stock, bonds, and alternatives since those assets tend to move in different directions, with the result being that investors experience a “smoother” experience. This year, though, that just hasn’t worked.
The best strategy, in hindsight, would have been to be in all cash at the beginning of the year. But of course, that’s not a very realistic strategy. As investors, we must use proven strategies, like diversification, with the knowledge that this will work out most, but not all, of the time. For example, in a great piece from Capital Group, they report that the stock market has gone up 73% of one-year periods. Those are pretty good, but not great odds. But let’s look at longer periods. The market has gone up 83% of 3-year periods, 87% of 5-year periods, and 94% of 10-year periods. So, when we advise clients on building their investment portfolios, we use statistics like this to help us over the long run. https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html
The odds are even more in your favor if you add in bonds. A blend of 60% stocks (Vanguard Total Stock Market ETF) and 40% bonds (Vanguard Total Bond market ETF) has had positive returns about 82% of 1-year periods, 93% of 3-year periods, and has never had a negative 6-year period. You can see why a blended portfolio like this has been so attractive to many investors in the past. http://www.lazyportfolioetf.com/allocation/stocks-bonds-60-40-rolling-returns/
Unfortunately, this is one of those rare years that a blended portfolio has not worked, at least so far. But I don’t think you throw out the playbook. Again, if a blended portfolio has worked 93% of 3-year periods, the odds are heavily tilted in an investors favor. As Ben Carlson wrote recently in his Wealth of Common Sense blog, “Bear markets tempt you into thinking the days are more important than the years.” Let’s try not to focus on the short-run.
Then what do we do from here? Well, patience will be key, and I do think that there are brighter days ahead. If I’m right, and there is a recession next year, then I would expect longer-term interest rates to decline, which should help bond prices move higher. Stock prices probably can’t move a lot higher if there is a recession, but interestingly, the stock market has historically bottomed before the end of a recession. In this case, I think that means that we should see stock market prices bottom sometime in the early part of next year. And some sectors of the market could start rebounding even sooner.
Circling back to the election, I know I have mentioned this before in my newsletter, but the stock market has a remarkable win-rate following mid-term elections. In fact, since 1962, the market has been up in every single 12-month period following a mid-term election, with an average return of 16%. Given my expectation for a recession, I’m not expecting a 16% increase in the stock market in the next year, but the odds are definitely in favor of a positive return. https://www.usbank.com/investing/financial-perspectives/market-news/stock-market-performance-after-midterm-elections.html
We’re all headed into a busy time of year, so I wanted to remind you that the stock market 9and our offices) will be closed on November 24 for Thanksgiving and December 26 for Christmas day observance. We are quickly closing in on deadlines to establish Donor Advised Funds and for making Qualified Charitable Distributions from IRAs. Remember to make Required Minimum Distributions from IRAs, too, as the penalty for not doing so is very steep.
If I don’t get to speak with you before then, I hope you have a very Happy Thanksgiving! If you need anything from Signature Wealth Strategies, please don’t hesitate to call.