Washtubs Not Teaspoons
Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.
-Warren Buffett
We've made it to October! Right off the bat, we want to acknowledge it has been a hard year for investors. We know it's tough to see your savings deteriorate in value, and it's years like this that we truly appreciate the trust you place in our hands. All of our strategies are constructed for long-term growth and, while we expect, prepare, and plan for years like this to happen, it's still never easy when it does. We ask for your patience through the storm and your trust that the sun will shine again.
What inning are we in?
As the great philosopher of our time, Mike Tyson, once said "everyone has a plan until they get punched in the mouth," and 2022 continues to deliver direct punches. After what we had hoped was a glimmer of a turnaround in July and August, September came in and dragged us back down to the June lows, with the broad S&P 500 down 25% YTD.
Consider the chart below. Since 1980, the S&P 500 has been down over 20% intra-year eight other times. And every time, recovering to new highs. In three of these instances, the market recovered to finish positive on the year (1987, 2009, and 2020). In four other instances, the market went on to return over 20% in the year following (1991, 2003, 2009, and 2021).
For those on the edge of their seats in this environment, it's worth stepping back to look at some different time periods for perspective. While S&P returns are down 25% year-to-date through the end of September, the index is still positive since the Covid-19 peak in January 2020 and up over 45% since the beginning of 2019 (inclusive of this year's bear market).
So when will it turn around? We don't know, but that doesn't mean our investment staff are just bumbling around in the dark with your money. The markets are poised on a knife's edge, trying to pinpoint exactly when the Fed will moderate its aggressive rate hikes. We believe this inflection point is fast approaching, within 1%.
The key data indicators to watch for are:
- lower core CPI — a key sign that Fed action is having its intended effect; and
- lower monthly non-farm payrolls.
You read that right. The market wants to see signs of a weakening labor market to begin its recovery. The Bloomberg implied forward rates suggests that the terminal fed funds rate is at 4.67%.
Buying opportunity in equities!
Which brings us to our next point — bear markets create opportunities for long-term investors. We (the Directors of Radix Financial) believe in "putting our money where our mouth is." And we have, being fully invested with our personal savings right alongside our clients. We are absolutely pushing equity mandates to the upper limit and sticking to our discipline.
A key tenet of investing is that achieving long-term returns REQUIRES risk. As Howard Marks famously says "the biggest investing errors come not from factors that are informational or analytical, but from those that are psychological."
Bonds are back baby!
While we believe that the equity markets are where the bulk of long-term growth will predominantly occur, bonds are now at levels that can begin to support portfolio income needs at levels we haven't seen in a decade!
Even as recently as last year, a 10-year US Treasury note was offering only a meager 1.52% annual yield-to-maturity.
But that tide is turning. Buying individual bonds allows us to "lock in" the rate of return we're going to earn on the day of purchase, dutifully collecting coupon payments, and holding to maturity. For those nearing retirement, rising rates are the best-case scenario.
Portfolio changes
Long-term investing is like being a passenger on a ship crossing the ocean from one continent to the other. You can take a large cruise ship, knowing that if the weather turns bad, you can simply go under deck and trust that the captain (your advisor) knows what they're doing. You may be seasick for a few days, but you'll reach your destination safely.
Alternatively, you could try to time the market by joining the crew of a small sailboat. Some days you may be able to move much faster than the luxury cruise liner. It's an exciting life with rarely a dull moment; however, a large storm could wipe you out, leaving your boat irreparably damaged.
By the way, the market returned 31.5% in 2019 immediately after the publishing of that article. So, while we make no guarantees, we offer a luxury cruise ride, built to withstand the storm.
In August, we exited our publicly traded REIT exposure across all portfolios which has worked out well, as they have traded down 18% since then. We see a shift of "power" away from landlords and sellers and back into the hands of renters and buyers.
Secondly, we are beginning to rotate out of fixed income funds and into individual corporate bonds in larger accounts. For the first time in a decade, we have the ability to lock in yields-to-maturity of over 5%.
Within our individual equity portfolios, we made the decision to sell Align Technology Inc. (ALGN), maker of Invisalign braces, just before reporting Q2 earnings. ALGN contributed a return to the portfolio of +26.8% over the holding period.
In its place, we have purchased CVS Health Corp (CVS) within the healthcare sector. CVS offers an attractively diversified conglomerate poised for high growth through strategic acquisitions.
Chevron Corp. (CVX) was also added to the portfolio, in the oil & gas sector. With mounting pressures in Europe and a relatively small energy allocation within the S&P 500, we believe that a bigger name with global exploration & production exposure will serve the portfolio best.
To make room within the portfolio, we reluctantly said goodbye to Scotts Miracle Grow (SMG) at a loss. We have lost faith in management's ability to navigate through the current supply chain difficulties.
As always, we appreciate your business, and welcome your feedback, comments, concerns, and questions.
Sincerely,
Amy Hubble and Jessica Jablonowski
