I hope you had a wonderful Fourth of July weekend.

Today I’m briefly recapping market returns. Based on conversations with some folks, it certainly feels like a brutal year so far given the dynamic of both bonds and stocks being down together.

Although, safe, high-quality bonds seemed to have turned a corner very recently with the 10-year treasury back below 3%, which has been positive for treasury prices, while stocks have continued their slide.

This year also appears to be the year that the bubble in low-quality, speculative assets have popped (e.g. cryptocurrencies, tech stocks, NFTs). Beanie babies anyone?

The chart below displays returns for the various primary asset classes (bonds, stocks, commodities, U.S. dollar, real estate) for the quarter, year-to-date, last 12 months and last 3 years (annualized).

We see that for the quarter, year-to-date and/or last year the only positive performers were the U.S. dollar, broad commodity complex and gold.

For the year so far, the U.S. dollar is up over 9% even in a highly inflationary environment! Meanwhile, global stocks are down over 20% for the year and U.S. bonds, broadly, down over 10% for the year.

This may seem strange, but a 20% decline for stocks isn’t all that notable.

We also observe the economy contracted in Q1 and was flat, or maybe even contracted, in Q2 leading to very real possibility of a recession (we’ll find out Q2 growth soon enough).

We know that on average bear markets take 18-24 months to resolve and lose around 40%-50%, but that this bear market started with stock market valuations at historical extremes implying the bear market could be worse than average as stocks would have farther to fall to get back to fair value.

If we look at historically-reliable valuations we see that stocks are still expensive in the context of history.

So, I continue to maintain a conservative bias in both the way client portfolios are positioned and in the return assumptions I’m using within clients’ financial projections in order to make better financial decisions.

Below we find a recent chart from Dr. John Hussman showing five of the most reliable valuation metrics. The indication is that U.S. stocks are still very expensive in the context of history.

You might also recall the chart below I’ve shared in the past that shows one of the most reliable valuation metrics, “Nonfinancial market capitalization / Gross Valued-Added” indicating a 6% annualized loss for U.S. stocks over the next 12 years.

Well, the updated version of this chart as of 5/31/2022 indicates “just” a 3.5% annualized loss for the next 12 years. So, valuations have improved, but it’s not as if U.S. stocks are priced attractively yet.

For now, my approach continues to be patient and disciplined. There will be a time to get more aggressive again in the future, but, at least based on historical data, it does not appear we’re at that moment yet. Some safer assets may provide better opportunities for returns than U.S. stocks over the next year or two.

We’ll let this economic slowdown marinate and allow asset prices to drop to more attractive, sustainable levels before we start over-weighting risk.*

I’m also not making significant adjustments to assumed returns within client financial projections yet. However, if stocks continue to decline those projected future returns start rising back towards their historical averages.

*Note: the discussion about overweighting / underweighting risk is relative to each household’s unique circumstances, risk tolerance, biases, investment philosophy and is not a one-size-fits-all statement. 

Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.

Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here. Any forecasts made are the opinion of the author. Markets are famously difficult to predict precisely because so many factors are involved…particularly over short time periods.

This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.

Views provided here are current only as of the moment of posting and are subject to change at any time without notification.

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