October 14, 2022
Allworth Chief Investment Officer Andy Stout explains why we believe in sticking with your investment strategy, even as markets continue to struggle.
When I was returning from vacation this summer, there was a two-hour backup on the interstate because of construction. Fortunately, or so I thought, my “smartphone” instructed me to take a detour to reduce the delay to an hour.
I followed my device’s directions and was greeted by an extra 3.5-hour delay.
Clearly, I should’ve stayed the course.
Aside my travel adventure, we believe that staying the course is also the best advice for today’s investors. We understand that in times like these you might wonder if you should change directions. After all, it’s been a tough and sometimes scary year for all investors, with both stocks and bonds struggling.
But these struggles are exactly why you should block out the impulse to take shortcuts. Here's why.
The stock market’s 24% drop this year is the third-worst start to the year since 1945. Fortunately, returns over the next 12 months show why staying the course makes sense.
The average 12-month return was an impressive 16.1% for the nine other worst starts to a year. Of course, there is never a guarantee that the future will repeat itself, but historically, it always has.
On the bond side of the equation, 2022 has definitely been the worst start to the year since the Bloomberg Aggregate Bond Index began in 1976. There were seven other years where the bond market posted negative returns in the first nine months. But, like stocks, returns over the next 12 months were undeniably positive, averaging almost 10%.
To be absolutely clear, we would not be surprised by additional short-term market turbulence in either stocks or bonds. However, history suggests that staying the course will ultimately be profitable. You can see this in the tables above and by looking at any long-term charts of stocks and bonds to see how they have historically moved higher.
Economists currently believe that the US economy rebounded to grow about 2.5% in the third quarter. But what matters the most is the Federal Reserve’s actions to tame inflation. The latest CPI (Consumer Price Index) report showed that total consumer inflation increased by 8.2% over the past year.
Interestingly, a chart of total inflation shows that the recent spike has lifted prices to levels where we might have ended up had it not been for the Great Recession. Following that crisis, we entered a period where inflation was lower than what the Fed desired, which is why interest rates were near zero for so long. Now, prices are up to their 30-year trend level.
Despite the total inflation level, the Federal Reserve is most worried about the current inflation rate of change. Even though the current 8.2% year-over-year change is lower than June’s 9.1%, it’s nowhere near comfortable levels.
As a result, we expect the Fed to remain aggressive in its fight against inflation. The committee will probably increase short-term interest rates by 0.75% when it meets on November 2. That would be the fourth consecutive 0.75% rate hike and would lift the fed funds rate to a target range of 3.75% - 4.0%.
The Federal Reserve has been able to hike interest rates this abruptly because of the still-strong job market. Specifically, September’s unemployment rate fell back to 3.5%, a 40-year low. (The Federal Reserve has a dual mandate of stable inflation and full employment.)
However, a few labor market cracks have appeared. Specifically, the number of job openings unexpectedly fell from 11.1 million to 10.1 million, indicating employers are hiring fewer people. Additionally, a recent survey showed that manufacturers had pulled back on hiring. Finally, the number of layoffs has started to move up.
Unfortunately, the Federal Reserve likely won’t pause in its rate hikes until it sees consistent evidence that inflation is falling. Herein lies the risk. Monetary policy (i.e., rate hikes) works with about a 6-12 month lag, so, in that sense, the Fed actually doesn’t have a strong indication of the economic effects of the actions it’s already taken.
A problem with veering off course is that it can be challenging to get back on track. The reason for that is emotions can take over. For example, it seems easy to bail out when things look scary, but when do you get back in? There is no all-clear signal the market can give you.
In fact, it’s quite the opposite, because when the economy and market appear to be at their worst, it’s often an excellent opportunity. (You can see this in the tables at the beginning of the article.)
We recognize that anxiety about the economy and the market are high and that it’s been a challenging year for all investors. However, we also acknowledge that markets move higher over time, and staying invested has benefited countless patient investors. Of course, navigating this terrain can be challenging, but understanding the numerous capital market interactions can help ensure your investments are prudently positioned for long-term success.
October 14, 2022
All data unless otherwise noted is from Bloomberg. Past performance does not guarantee future results. Any stock market transaction can result in either profit or loss. Additionally, the commentary should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the provided information. Market and economic conditions could change in the future, producing materially different returns. Investment strategies may be subject to various types of risk of loss including, but not limited to, market risk, credit risk, interest rate risk, inflation risk, currency risk and political risk.
This commentary has been prepared solely for informational purposes, and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or instrument or to participate in any particular trading strategy or an offer of investment advisory services. Investment advisory and management services are offered only pursuant to a written Investment Advisory Agreement, which investors are urged to read and consider carefully in determining whether such agreement is suitable for their individual needs and circumstances.
Allworth Financial and its affiliates and its employees may have positions in and may affect transactions in securities and instruments mentioned in these profiles and reports. Some of the investments discussed or recommended may be unsuitable for certain investors depending on their specific investment objectives and financial position.
Allworth Financial is an SEC-registered investment advisor that provides advisory services for discretionary individually managed accounts. To request a copy of Allworth Financial’s current Form ADV Part 2, please call our Compliance department at 916-482-2196 or via email at compliance@allworthfinancial.com.
.svg)
.svg)
.svg)
.svg)
Privacy Policy | Disclosures | Cookie Preferences | Do Not Sell or Share My Personal Information
Advisory services offered through Allworth Financial, a Registered Investment Advisor | Disclosures | Privacy Policy
Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Check the background of this firm on FINRA's BrokerCheck.
HMRN Insurance Agency, LLC license #0D34087
1Barron’s 2024 Top 100 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking of independent advisory companies is based on assets managed by the firms, growth, technology spending, succession planning, and other metrics.
2 Retention Rate Source: Allworth Internal Data, FY 2022
3 The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey.
4 As of 7/1/2024, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $22.5 billion in total assets under management and administration.
5 InvestmentNews 2020 and 2021 Best Places to Work for Financial Advisers. The ranking reflects survey responses and scores completed by both employers and employees. Employers report their organization’s workplace policies, practices, and demographics. Employees complete a survey designed to measure the employee experience.
6 2021 Value of an Advisor Study / Russel Investments
7 Ranked 9th Top Wealth Managers By Growth in Assets in the U.S. from RIA Channel, 2022. RIA Database and RIA Channel are registered trademarks owned by Labworks, LLC.
8 USA Today Best Financial Advisory Firms 2024. The ranking is based on the growth of the companies’ assets under management (AUM) over the short and long term and the number of recommendations they received from clients and peers.
9 NBRI Best in Class Ethics 2023. The Best in Class level is bestowed upon clients performing at or above 90 percentile of the NBRI ClearPath Benchmarking Database.
✢ Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.
✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.
†Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.