October 2022 update on market conditions
The following communication was sent to our clients on October 11, providing an update on market conditions.
Last spring, we sent a communication acknowledging our global reality has a heaping spoonful of anxiety inducing uncertainty. Unfortunately, many of the factors leading to that reality still exist today and have, in fact, intensified.
The war between Russia and Ukraine remains unresolved which has caused energy crises around the globe. Market volatility caused the Bank of England to intervene in its bond markets to defend its pension system. And the Federal Reserve continued to increase rates at a torrid pace in an attempt to stem inflation caused by the global pandemic.
Unsurprisingly, all of these issues have wreaked havoc on financial assets. This year, investment losses in asset classes ranging from tech stocks to government bonds have resulted in one of the worst years on record for a balanced portfolio. And, to pour salt in the wound, inflation persists as evidenced by surging grocery bills, higher prices at the pump, and skyrocketing mortgage rates.
All that said, this message isn’t intended to cause fear or panic. Rather, it’s intended to amplify the importance of having a long-term financial plan. It’s times like these where we lean on the plan we proactively built together, a plan that embraces the reality of market downturns by allocating across investment buckets of varying time horizons, each with a different purpose.
We hold stocks for long-term growth and inflation protection. The last few years (and decade frankly) taught us a fair amount about upside volatility, and we are just now starting to see the flipside of that coin. While it can be unsettling to see the stock market lose a quarter of its value in only 9 months’ time, keep in mind that stocks are long-term investments. We don’t intend to access this bucket for 10+ years.
Bonds are included for relative safety and stability compared to stocks. Bonds, like stocks, have been negatively impacted by the Fed’s actions but not nearly to the same extent. As such, diversification benefits remain, especially in a “flight to quality” environment like we experienced in 2008. We emphasize short term bonds for expenses in the next 1-5 years and intermediate bonds for the next 5-10 years. When possible, we suggest including Series I Savings Bonds in this bucket which are paying currently 9.6% interest with a reset scheduled for November.
Lastly, we hold cash for expenses within the next year. Unlike with stocks or even intermediate bonds, volatility is unacceptable in this bucket. Cash has been king this year as a result of the aforementioned rate increases. Believe it or not, savings accounts are now paying 2% and 1-year CDs are paying 4%. We haven’t seen rates like this in years which finally offers an opportunity to maximize bank interest.
While your portfolio shows a bottom-line balance, it’s important to recognize this balance is an aggregation of the various buckets mentioned above. Each bucket should be evaluated against its unique objective and considered in the context of its role in your financial plan, a plan designed for success over multiple decades, not multiple months.
As always, we are available to help address any questions and concerns you may have. We appreciate your trust and confidence in us to help you navigate the challenges we’re facing together.
FINANCIAL SERVICE GROUP, INC.
Mike Haubrich, Justus Morgan, Justin Moilanen, and Vince Tortorici