The Armbruster Capital Management News & Education section of our website incorporates articles, vidcasts, and newsletters specifically geared towards issues that our clients are facing today.
Stock and bond markets enjoyed some relief to close out 2022 after dismal returns for most of the year. The S&P 500 gained 7.6% for the fourth quarter while the Bloomberg U.S. Aggregate Bond Index rose 1.9%. Despite the rebound, 2022 was one of the worst years for both bonds and the traditional 60% stock/40% bond portfolio in recent history.
Stock and bond markets enjoyed some relief to close out 2022 after dismal returns for most of the year. The S&P 500 gained 7.6% for the fourth quarter while the Bloomberg U.S. Aggregate Bond Index rose 1.9%. Despite the rebound, 2022 was one of the worst years for both bonds and the traditional 60% stock/40% bond portfolio in recent history.
Over the past almost 15 years, diversification was a fool’s errand. Simply buying the largest, techiest, US-based stocks would have yielded the largest rewards. Why bother with small-cap stocks, international diversification, or Warren Buffett’s precious value stocks (what does that old coot know anyway)? FAANG stocks were all that were necessary to earn market-beating returns.
The field of economics is often referred to as the dismal science. Today’s environment certainly helps us understand that moniker. Inflation is running amok, interest rates are moving aggressively higher, stock and bond markets are both down considerably, and we may already be in a recession. It is not hard to paint a picture of more downside ahead. All eyes have been on the Fed lately to cure these problems.
Today, market sentiment is about as bad as it gets. The black line in the chart below shows how individuals and institutional investors feel about the prospects for the stock market. It is almost as low as it was in 2008. That is not terribly surprising given how both stocks and bonds have performed so far this year. However, sentiment tends to be a contrary indicator.
The stock market fell for a third consecutive quarter, adding to its losses for the year. After a slight rebound to start the quarter, gains reversed sharply in September as the S&P 500 fell by more than 9%, making it the worst month for the index since the Covid downturn of March 2020.
We wrote an article for the CFA Institute back in 2013 on what has happened to the stock market during periods when America was at war. While we’re not technically at war today, we thought it would be interesting to revisit the data. The numbers from our original study are presented in the table below, but the punchline is that the stock market has generated returns above historical averages and with less risk during periods of war.
I’m not really a sports guy, but a famous Wayne Gretzky quote keeps rising to the top of my mind: “I skate to where the puck is going to be, not where it has been.” Hackneyed? Yes. Insightful? Also yes. And, a particularly apt warning for stock and bond investors for today’s shifting economic environment.
The Dow will rise to 40,000 in the next 12 months. That’s not so much a forecast as it is a warning. Sure, a rising stock market may sound exciting, but too much of a good thing can pose eventual problems. And, if history is any guide, a quick jump to 40,000 is very possible, but so is a subsequent correction that could take the Dow to 18,000.
Here’s today’s dirty little secret that no one wants to talk about: your investment portfolio is likely underperforming the market this year. Worse, you are probably lagging behind school-aged day traders on the new Robinhood trading app.