Goodbye February. The market has not been kind to investors so far in 2022. The S&P 500 index hit its all-time peak of 4,818.62 on 1/4/2022. Since then, it has been abruptly impacted by the war in Ukraine, concerns about high inflation, and the Fed’s announcements to increase interest rates in 2022. Between 1/1/2022 and 2/28/2022, the S&P 500 stock index dropped 8.0%. In the last 97 years (we have good data going back to 1926 thanks to the University of Chicago’s CRSP database), this was the 5th worst start to a year.
2 Months End |
Current Events | |
|---|---|---|
| End of the Great Recession | ||
| End of the Great Depression | ||
| Middle of the Great Recession | ||
| COVID | ||
| Ukraine, Inflation, and Rising Rates |
Our long term, diversified portfolios are not down as much as the S&P 500 stock index because our diversifying asset classes have not experienced price declines as severe as the S&P 500 index, but all of our portfolios are down Year-To-Date (YTD). The table below shows YTD returns for asset classes we include in our portfolios, as well as returns for the last three years. Growth Stocks’ loss of 12.5% is the worst YTD return in the table, but as the third column shows, Growth Stocks were the highest returning asset class for the last 3 years so it shouldn’t be a big surprise that they would pull back the hardest in a subsequent downturn.
| Asset Class | Through 2/28/2022 |
12/31/2021 Total Return |
Return 2021 |
Return 2020 |
Return 2019 |
Representative Index Name |
|---|---|---|---|---|---|---|
| US Stocks | S&P 500 | |||||
| US Growth Stocks | Russell 1000 Growth | |||||
| US Value Stocks | Russell 1000 Value | |||||
| Small Cap US Stocks | Russell 2000 | |||||
| International Stocks | MSCI EAFE | |||||
| Emerging Market Stocks | MSCI Emerging Market Equity | |||||
| High Yield Bonds | Bloomberg US Corporate High Yieldl 2000 | |||||
| Long Term Gov’t Bonds | Bloomberg Long Term US Treasury | |||||
| Intermediate Bonds | Bloomberg US Aggregate Bond | |||||
| 3 Month T-Bills (Cash) | ICE BofA US 3 M Treasurv Bill |
The S&P 500’s 3 year return of 100.4% is remarkable, as the average 3 year return for this index since 1926 has been 40.1%. Low corporate tax rates, low interest rates, and business friendly government have boosted returns.
As long term investors, we do not plan on making any big moves in our portfolios to try to predict the short term direction of asset classes. We include active fund managers in our portfolios who are experts in their asset classes and make active buys and sells to try to capture market alpha - a very difficult job with the diverse mix of recent economic events going on.
During March, we will be doing a deep dive review of each of the funds we use in our portfolios and I expect to make a couple of changes. I have not been happy with the performance of the Vanguard FTSE Emerging Markets ETF (ticker: VWO) that we include in our portfolios. The fund’s allocation to Chinese stocks is at 34%, while the average emerging market equity fund is at 28%. The extra China exposure has been a drag on performance over the last five years, as the stocks that US investors are permitted to purchase in China have trailed stocks from other emerging market countries. Often stocks and broad markets that fall behind averages for a few years have a tendency to rebound and outperform, but I am concerned that China may have implemented excessively burdensome restrictions on foreign investments that may cause their stocks to continue to trail global averages.
Another ETF that is “on watch” is Vanguard Short-Term Bond ETF (ticker: BSV). It spreads its investments between government bonds and corporate bonds. Relative to other short term bond funds, it has a higher than average allocation to very safe, but lower returning government bonds. We may want to switch to an alternative fund that mixes in an allocation to mortgage backed bonds that typically pay a bit more in return.
Disclosures-
Opinions expressed are as of the current date; such opinions are subject to change without notice. Advyzon Investment Management shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information, data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Please note that references to specific securities or other investment options within this piece should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment.
Performance data shown represents past performance. Past performance does not guarantee future results. All investments involve risk, including the loss of principal. There can be no assurance that any financial strategy will be successful. This commentary contains certain forward-looking statements. We may use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.
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“CRSP” stands for Center for Research in Security Prices. Part of the University of Chicago’s Booth School of Business, the CRSP is a nonprofit organization that is used by academic, commercial, and government agencies to access information such as price, dividends, and rates of returns on stocks.
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