October 6, 2022
Dear Clients & Friends,
This has clearly been a challenging year for investors and – more importantly – for individual households. Stocks and bonds are both down significantly. Elevated food and gas prices continue to stretch budgets, and higher interest rates have increased borrowing costs for both consumers and corporations. These concerns are especially worrying for folks in retirement, who are living off their fixed income sources and portfolio withdrawals—and if your retirement began within the last decade this is the first time you’ve experienced this level of market mania since you stopped working.
With fears of a looming recession shaping the investing narrative it is natural to wonder, “What else can go wrong?”, but the right question is, “How much of what can still go wrong isn’t already priced in?” My answer: probably not much. We’re watching investors flee equities just as much as they did in the worst of the coronavirus pandemic, and during the Great Financial Crisis. However, we continue to see signs that the worst may be behind us. Gas prices are falling (in some areas). Inflation pressures stemming from supply chain disruptions are easing. And the Federal Reserve is taking the fight against inflation head on and is doing its job by aggressively raising short-term interest rates. While the Fed may still gradually increase rates throughout 2022, they have done much of the heavy lifting already as evidenced by the significant market drawdown this year.
While it is entirely possible the market may go down further, at times like this the risk is not that you’re going to get caught in the last 10% decline before the market ultimately bottoms and begins to recover (which it always does). The big risk is that you’re going to get caught outside the next 100% advance (while waiting for things to calm down). That’s something for which your retirement plan may never recover.
As the third quarter comes to an end, it’s admittedly difficult to be optimistic about the capital markets right now. The most recent quarter saw both stocks and bond prices fall in tandem again. The negative returns for both markets were the third consecutive quarterly declines for stocks and bonds. Of the 187 quarters since 1976, there has never been a period that has seen negative quarterly returns for both stocks and bonds three quarters in a row. Said another way, this is the longest period since 1976 that bonds haven’t played the traditional role in portfolios by offsetting losses in stocks.
So, why own bonds at all? The value proposition for core bonds is that they tend to provide liquidity, diversification, and positive total returns to investment portfolios. Unfortunately, none of those propositions is 100% certain all the time. Like all markets, fixed income investing involves risks and, at times, generates negative returns. However, despite the historically poor start to the year, the value proposition for core bonds has actually improved recently. Investing is a forward-looking exercise and with the move higher in yields that has already taken place this year, it may be as good as it’s been in quite some time for core bonds. Starting yields on most fixed income asset classes are hovering around the highest yields we’ve seen in over a decade. So, we don’t think now is the time to abandon your existing allocation to bonds.
We acknowledge how difficult it is to stay invested during these bouts of market volatility. But the capital markets have already priced in a lot of bad news, and we think we are closer to the end of this negative cycle than the beginning. Potential catalysts for a rebound in the near-term include third quarter earnings season, midterm elections, tailwinds from a seasonally strong fourth quarter historically, and the Fed possibly signaling a pause in rate hikes by year-end. While there may be continued volatility in the near-term, we believe the surest path forward remains to stay true to your existing financial plan.
As always, thank you for your continued trust and loyalty. Our primary mission at Mercer Partners is to help our clients retire comfortably and stay comfortably retired, so if you have any questions or if you would like to discuss your retirement plan in more detail please contact us directly-- that's exactly what we're here for.
-Nick
Important Information
Nick Enzweiler is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group, a registered investment advisor. Strategic Wealth Advisors Group and Mercer Partners Wealth Management are separate entities from LPL Financial.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of October 4, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Past performance does not guarantee future results.
Asset allocation does not ensure a profit or protect against a loss.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions.