This has been a tough year for investment markets with rising interest rates producing a common result for investments of all kinds, in dollar terms:
Here’s the British Pound vs the dollar, now priced at $1.13, the lowest price in decades.
Here’s the Euro, at 98 cents!
The S&P 500, down 21%
High quality corporate bonds, down 19%
And just for fun, Bitcoin, down 60% ytd and down 71% from it’s November 9 peak
This is another painful lesson in: You can’t diversify away from systemic risk. And there is no more systemic risk to investment prices than a credit contraction in dollars. Per Bloomberg, 30-year mortgages hit 6.29% today, so I bet you can make a good guess about real estate prices from here.
So, what’s the point? You’re not stupid for owning assets, just because they go down in price sometimes. This year, there was a binary call to make: to what degree do you choose to own assets of any kind, rather than just holding cash? Other than energy investments, cash in USD has been about the best thing going, and you can buy a lot more with your USD than you could at the beginning of the year, despite inflation.
Ok, when can you buy? Bank of America says this year is tracking to be the worst year for the 60% stock/ 40% bond portfolio since 1936. So, there’s a decent chance if you just bought everything, you could have a positive rate of return in 1-2 years.
I say that because this is an engineered correction, possibly recession. The economy was growing well enough before the rate hikes. And when the data changes, the fed can let up the pressure on the markets.
However, for now, we have to bear in mind that investments we purchase through this part of the cycle might have pretty good risk/reward characteristics, but that our initial experience in the next few months- especially with equities- might be that prices fall further before the cycle turns.
My bet is that the pain in fixed income is almost over. The 1-year US treasury note pays about 4%. Where’s the top of the cycle? 4.5%, 4.75%? We don’t really know the answer to that question, but the negative side effects of the strong dollar- on investments, on the global economy– will be something the fed has to consider next year. For now, the Fed can focus on inflation, because the US has full employment and some growth. However, the effect of these rate hikes should start to show in the coming 2 quarters, and we will likely see a slowdown in growth and inflation.
A word to the wise: don’t get too caught up in the game. There will be another time, in the not-too-distant future, where we are worried about something else.
But for now, we are fighting some battles that need to be fought, specifically the fight to support Ukraine and punish Russian aggression, and the fight against inflation, which is partly a by-product of the war between Russian and Ukraine.
I say that we are very lucky- both economically and in terms of physical safety- to be living in the United States.
We have extremely competent government, a thing we seem to take for granted while we slander the government. Despite past failures in intelligence, the CIA and the US military- as well as the Biden administration– have absolutely crushed it on the global level. This is the most competent foreign policy we have seen in a couple of decades, and there’s no place I’d rather be an investor than the United States, where we control the global currency and where we fund the world’s largest military. Look around the world. Which other major economy do you trust more?
There are perils to the situation. Mistakes in perception or tactics could be costly. However, the current policies of firm resistance to aggression, combined with moderation in the weapons supplied to Ukraine, the building of a Pacific trade and security coalition to contend with China, and the progress towards a 15% global tax policy are shoring up the walls of the American empire. These policies bode well for American global leadership, if you can look a little farther down the road.
In the meantime, go on a hike, cook dinner outside, spend time with your family, travel, lose some weight, make love, dig a ditch, grow some fall lettuces. Know what’s going on but keep your feet on the ground.
You can get sucked into the ever present, anxiety inducing internet/ tv influence cycle that puts a *political interpretation on everything.
But why? This is not the better part of wisdom. Stay analog, my friends.
Jeremy L. Strickler, CFP®
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
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