SJS Weekly Market Update
SJS Investment Services creates a weekly market update to summarize performance characteristics for major stock and bond indices.
Each week, SJS Investment Services creates a Weekly Market Update to summarize performance characteristics for major stock and bond indices. Please click on the below image to view the most recent Weekly Market Update PDF.
Past Weekly Market Updates:
Important Disclosure Information:
Past performance does not guarantee future results. There is no guarantee investment strategies will be successful. Diversification neither assures a profit nor guarantees against a loss in a declining market. Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. This material has been prepared for informational purposes only.
All returns represent total return (including reinvestment of dividends) for stated period provided by Morningstar Direct.
Equity indexes are as follows: US Market (Russell 3000 TR USD Index measures the performance of the largest 3000 US companies representing approximately 98% of the investable US equity market. It is market-capitalization weighted.); US Large Cap (S&P 500 TR USD Index measures the performance of 500 widely held stocks in US equity market. Standard and Poor's chooses member companies for the index based on market size, liquidity and industry group representation. Included are the stocks of industrial, financial, utility, and transportation companies. Since mid 1989, this composition has been more flexible and the number of issues in each sector has varied. It is market capitalization-weighted.); US Small Cap (Russell 2000 TR USD Index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.); Global Market (MSCI ACWI GR USD Index measures the performance of the large and mid cap segments of all country markets. It is free float-adjusted market-capitalization weighted.); Intl Development (MSCI EAFE GR USD Index measures the performance of the large and mid cap segments of developed markets, excluding the US & Canada equity securities. It is free float-adjusted market-capitalization weighted.); Emerging Markets (MSCI Emerging Markets GR USD Index measures the performance of the large and mid cap segments of emerging market equity securities. It is free float-adjusted market-capitalization weighted.); US Real Estate (DJ US Select REIT TR USD Index measures the performance of publicly traded real estate investment trusts(REITs) and REIT-like securities. The index is a subset of the Dow Jones US Select Real Estate Securities Index (RESI). The index is designed to serve as proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.); Intl Real Estate (S&P Global Ex US REIT TR USD Index measures the performance of publicly traded REITs and REIT-like securities, excluding those in the U.S., and is a sub-index of the Dow Jones Global ex-U.S. Select Real Estate Securities Index (RESI). The index is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.
Fixed Income indexes are as follows: US Aggregate – (Bloomberg Barclays US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. It rolls up into other Barclays flagship indices, such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt.); Global Aggregate (Bloomberg Barclays Global Aggregate TR USD Index measures the performance of global investment grade fixed-rate debt markets, including the U.S. Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities.); US Short Treasury – ICE BofAML 1-3Y US Trsy TR USD Index measures the performance of US dollar denominated sovereign debt publicly issued by the US government in its domestic market. Qualifying securities must have at least 1 year and less than 3 year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $1 billion. It is capitalization-weighted.); US Interm Corp & Govt (ICE BofAML 1-5Y US Corp&Govt TR USD Index is a subset of BofA Merrill Lynch US Corporate & Government Index including all securities with a remaining term to final maturity less than 5 years. The BofA Merrill Lynch US Corporate & Government Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, US agency, foreign government, supranational and corporate securities. Treasury Yields are as follows: US Treasury T-Bill Constant Maturity Rates (These rates are commonly referred to as "Constant Maturity Treasury" rates, or CMTs. Yields are interpolated by the Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. These market yields are calculated from composites of indicative, bid-side market quotations (not actual transactions) obtained by the Federal Reserve Bank of New York at or near 3:30 PM each trading day. The CMT yield values are read from the yield curve at fixed maturities, currently 1, 2, 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years. This method provides a yield for a 10 year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity.)
Style Returns: Style box returns are based on the Russell Index Style - Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 1000 Index (Measures the performance of the largest 1,000 securities in the Russell 3000 based on market cap and current index membership), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values),Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values).
Sector Returns: Sectors are based on the Russell Sector Classification methodology. Return data are calculated by Morningstar Direct using constituents and weights as provided by MSCI for the All Country World Index.
Market Indicator Indexes are as follows: Inflation - (The Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL) is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.); Unemployment - (The unemployment rate represents the number of unemployed as a percentage of the labor force. Labor force data are restricted to people 16 years of age and older, who currently reside in 1 of the 50 states or the District of Columbia, who do not reside in institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces. This rate is also defined as the U-3 measure of labor underutilization. The series comes from the 'Current Population Survey (Household Survey)').
Suggested Reading
SJS Outlook: Q1 2025
SJS Q1 2025 Outlook includes a market update, team highlights, SJS book club insights and important information on the social security fairness act.
Election Time
Every four years, we get the same question (whether you have asked it, or you are thinking it) – how will the election affect my portfolio?
By Chief Investment Officer Tom Kelly, CFA.
It is that time again. Political ads inundate your commercial breaks and news feeds. Elections are about a month away, with the focus being the battle for the White House. Every four years, we get the same question (whether you have asked it, or you are thinking it) – how will the election affect my portfolio?
For SJS, this is the eighth time we have been through this cycle and our answer has not changed – we do not know! It is not that we do not care, we just rely on the core fundamentals of MarketPlus® Investing as our guide:
Markets are efficient and are priced fairly.
Speculating is futile.
Global markets have rewarded investors over the long term.
Portfolio design matters most.
The markets – stocks, bonds, real estate, commodities, you name it – are all considering millions of data points, such as growth prospects, geopolitical challenges and opportunities, and yes, even who holds the White House and how that might affect the markets. But all that information is incorporated in the prices, both the prospects of risk and reward. That does not mean that prices are always right, but that you are being fairly compensated for the risk you take. Over time we believe investors are rewarded, and assuming appropriate portfolio design and diversification, this can assist in achieving your investing goals.
As things stand, the election odds for Kamala Harris and Donald Trump are roughly 50% / 50%, but come November 5th, those odds will end at 100% / 0% or 0% / 100% (barring some undetermined swing states). We will likely see some volatility leading up to and potentially even after the election, as markets weigh new developments. Take courage along the way, knowing we have designed your portfolios to navigate any political environment, and we will be there to adjust whenever the time comes.
Source: Morningstar, as of September 30, 2024. There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market. Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. See Important Disclosure Information.
Important Disclosure Information:
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
SJS Outlook: Q3 2024
This Outlook includes our discussion of election time, financial to-dos before the end of the year, new SJS Perrysburg office, SJS Team updates, and looking forward to Q4 2024.
Standing On The Shoulders Of Giants: The Evolution Of MarketPlus® Investing
When working with investment managers, we want them to share that same client-first philosophy and sit on the same side of the table with us.
By Chief Investment Officer Tom Kelly, CFA.
When he founded SJS in 1995, Scott J. Savage set out to provide a major money center management experience while maintaining small town values and putting the client first, all the time, every time. A novel idea back then in a world where the stockbroker business model was (and still is) embedded with conflicts of interest. There had to be a better way, to sit on the same side of the table as our clients and align our interests. It is this founding "first principle" from which everything else flows. And still to this day it allows us to filter everything we do through that same lens. For example, when working with investment managers, we want them to share that same client-first philosophy and sit on the same side of the table with us.
Stone Ridge Asset Management, one of the investment managers we work with, shares similar first principles. Stone Ridge aims to provide investors with access to diversifying investment strategies (such as reinsurance and alternative lending) that have low correlations to global stocks and bonds.[1] Many of these investment strategies have been historically difficult to access for most investors.
The search for investment strategies that perform differently from global stocks and bonds led us to Stone Ridge, but what kept us interested was their alignment with their clients and partners. Stone Ridge founder Ross Stevens studied at the University of Chicago under famed professor Eugene Fama, who won the Nobel Prize in Economic Sciences in 2013. The name Fama may sound familiar, as his market efficiency work has influenced MarketPlus® Investing. However, Stevens believes that Fama’s greater contribution is his work on the principal-agent problem. At many companies, ownership and day-to-day management are mostly separate. This can lead to each side having different information as well as contrasting motivations. As a result, decisions are often made by both ownership and management that are not best for the various stakeholders.
Stone Ridge seeks to minimize the principal-agent problem through partnering with industry leaders, sharing risk directly alongside them (gains and losses), and collaborating using proprietary data and evaluation techniques. Additionally, Stone Ridge employees invest in the various investment strategies, paying full fees like clients do.
In our first meeting with Stevens several years ago, he spoke about Stone Ridge’s culture. He shared insights on the investment strategies, like reinsurance, where they are one of the largest capital providers to reinsurance companies and partnering with them through risk-sharing – sitting on the same side of the table.[2] He then recounted the origin story of Stone Ridge, which is named after the small town in upstate New York that he holds special – all this from his office overlooking Wall Street. Talk about a major money center experience with small town values!
Important Disclosure Information & Sources:
[1] “Strategies”. Stone Ridge Asset Management, stoneridgeam.com.
[2] “Reinsurance”. Stone Ridge Funds, stoneridgefunds.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Hyperlinks to third-party information are provided as a convenience.
SJS Outlook: Q1 2024
The Outlook includes our evolving MarketPlus® Investing philosophy by standing on the shoulders of giants, and ways to help protect your personal information and financial assets. We also highlight The Ability Center and look forward to Q2 2024.
Growing Your Cash
You can consider putting excess cash into a money market fund, short-term U.S. Treasury bonds, or a short-term bond mutual fund / ETF.
By Chief Investment Officer Tom Kelly, CFA.
Interest rates are up everywhere. Except perhaps your bank account. While the Federal Reserve's rate hikes and skyrocketing mortgage rates dominate headlines, the fine print in your bank account statement, revealing the interest rate on your savings, isn’t making the same amount of noise. Perhaps it should, and for all the wrong reasons.
The national average rate for a bank savings account is a paltry 0.45%, as of September 2023.[1] While these rates have been low for quite some time, there have not been obvious and safe alternatives… until recently! One-month Treasury Bills now yield 5.55% on an annualized basis as of September 29, 2023.[2] Additionally, one-year rates are at 5.46% as of September 29, 2023.[3] These are short-term rates we haven’t seen in over 20 years.
See Important Disclosure Information.[1][2][3]
One of the key roles of an advisor is to identify opportunities in the market. And while they don’t always exist, or persist, we believe that this is an important area to pick up yield if you have excess cash on the side. You can consider putting that excess cash into a higher-yield money market fund, short-term U.S. Treasury bonds, or a short-term bond mutual fund / ETF. Please reach out to us to discuss the best options for your situation.
Important Disclosure Information & Sources:
[1] “National Deposit Rates: Savings, Percent, Monthly, Not Seasonally Adjusted”. FRED, September 2023, fred.stlouisfed.org.
[2] “Market Yield on U.S. Treasury Securities at 1-Month Constant Maturity, Quoted on an Investment Basis, Percent, Monthly, Not Seasonally Adjusted”. FRED, September 2023, fred.stlouisfed.org.
[3] “Market Yield on U.S. Treasury Securities at 1-Year Constant Maturity, Quoted on an Investment Basis, Percent, Monthly, Not Seasonally Adjusted”. FRED, September 2023, fred.stlouisfed.org.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training.
Hyperlinks to third-party information are provided as a convenience.
In The Hopes Of A "Soft Landing", There May Be A Crack In The Foundation
The future of the housing market is uncertain, and its resilience will be a crucial factor in the broader economic landscape.
By Chief Investment Officer Tom Kelly, CFA.
The housing market is often viewed as a cornerstone of financial stability. The home signifies a sanctuary, a place where one can relax, enjoy, live, and grow. In the 2008 housing crisis, we experienced how fragile the economy can be when the cornerstone is shaken. While global stock markets have broadly recovered since high inflation and fed rate hikes caused a recessionary scare last year, the housing market has continued to face seismic shifts that may put the chances of a so called “soft landing” on shaky grounds.[1]
In 2023, mortgage rates reached heights not seen in two decades, with the 30-year fixed rate mortgage average hitting a recent high of 7.31% in September.[2] At the same time, potential homebuyers found themselves in a daunting landscape with the number of homes for sale dwindling to 1.1 million as of August, with inventory over the last couple years reaching the lowest levels since 1982.[3] In stark contrast to the pre-pandemic era, there are now only around two-thirds as many homes available on the market.[3] With mortgage demand hitting a 26-year low in September, largely due to the scarcity of available housing inventory and little incentive to refinance, there doesn't appear to be much opportunity for those looking to make a move.[4]
Source: “30-Year Fixed Rate Mortgage Average in the United States”. Federal Reserve Bank of St. Louis, 1971-2023, fred.stlouisfed.org. See Important Disclosure Information.
But the challenges don't stop there. Rental prices have also seen a steady rise. The average rent for primary residences in U.S. cities remains 7.8% higher than a year ago as of August.[5] These elevated rental levels represent the most significant increases we've witnessed since the early 1980s.[5] Additionally, the Federal Reserve Bank of Atlanta estimates that the amount of income the median household needs to spend yearly in order to own a median priced home in the U.S. is 43.8% as of July, significantly higher than the 28.5% amount in December 2019.[6] While many homeowners are locked in to 3-4% mortgages, the next generation of buyers and families may be renting for a little while longer.
The various factors contributing to these unsettling trends in the housing and rental markets are multifaceted and complex. Markets tend not to like extremes, and the quest for stability and security in housing has become more elusive. The future of the housing market is uncertain, and its resilience will be a crucial factor in the broader economic landscape.
Important Disclosure Information & Sources:
[1] “SJS Weekly Market Update”. SJS Investment Services, sjsinvest.com.
[2] “30-Year Fixed Rate Mortgage Average in the United States”. Federal Reserve Bank of St. Louis, 1971-2023, fred.stlouisfed.org.
[3] “United States Total Housing Inventory”. Trading Economics, 1982-2023, tradingeconomics.com.
[4] “Mortgage Applications”. Mortgage News Daily, 1991-2023, mortgagenewsdaily.com.
[5] “Consumer Price Index for All Urban Consumers: Rent of Primary Residence in U.S. City Average”. Federal Reserve Bank of St. Louis, 1915-2023, fred.stlouisfed.org.
[6] “Home Ownership Affordability Monitor (HOAM)”. Federal Reserve Bank of Atlanta, 2023, atlantafed.org.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience.
SJS Outlook: Q3 2023
The SJS Q3 2023 Outlook includes our insights on gifting and charitable contributions as well as U.S. real estate. We also look forward to Q4 2023.
SJS Outlook: Q2 2023
The SJS Q2 2023 Outlook includes our insights on building up our local communities as well as market performance so far in 2023. We also share even more members of the SJS family and look forward to Q3 2023.
Unexpected Good News: Market Performance So Far In 2023
It’s important to recognize how difficult it is to predict what will happen in the short-term for investment markets, and how much margin for error there should be for any prediction.
By Chief Investment Officer Tom Kelly, CFA.
If you looked at economic and market forecasts at the beginning of the year, you may have expected a lot of volatility and negative returns in stock and bond markets for 2023. For example, the headline for J.P. Morgan’s 2023 Market Outlook is, "Stocks Set to Fall Near-Term as Economic Growth Slows".[1] Additionally, on the first page of UBS' 2023 US Equities Outlook, UBS writes, "With pressure on corporate profits for the next few quarters, equity markets could slip in the near term. However, the outlook should improve later in the year and into 2024."[2]
Contrary to these headlines, most global stock and bond markets are up to start 2023. While some markets (like U.S. bonds) are modestly positive based on their increased yields, others (such as U.S. stocks) are up significantly more than even we could have reasonably optimistically expected. We have experienced a lot of events to start 2023 (persisting core inflation, U.S. debt ceiling negotiations, the expansion of artificial intelligence, corporate job layoffs, etc.), and it would have been difficult for us to predict this market performance given these events. While it is easy to look back at the headlines from the beginning of 2023 and point toward their inaccuracies, it’s important to recognize how difficult it is to predict what will happen in the short-term for investment markets, and how much margin for error there should be for any prediction.
Source: Morningstar, as of June 30, 2023. The asset classes are represented by the following indices: U.S. Stocks - Russell 3000 Index (measures performance of the 3,000 largest U.S. companies representing roughly 96% of the investable U.S. stock market); International Stocks - MSCI All Country World Ex USA IMI Index (Gross Div.) (measures performance of approximately 99% of the global stock opportunity set outside of the U.S.); U.S. Bonds - Bloomberg U.S. Aggregate Bond Index (tracks performance of the U.S. investment-grade bond market); International Bonds - Bloomberg Global Aggregate Ex-USD Bond Index (Hedged To USD) (measures the performance of international investment grade bonds, with currency exposure hedged to the U.S. dollar); Global Real Estate - S&P Global REIT Index (Gross Div.) (tracks performance of publicly traded equity REITS globally). The index performance figures assume the reinvestment of all income, including dividends and capital gains. See Important Disclosure Information.
When it comes to investment markets, it’s easy to look back positively on the past and worry about the future. This is part of human nature, written about extensively through research on biases such as the availability bias (over-emphasizing news that is readily available to us) and negativity bias (focusing on negative aspects of a situation). This makes sense, because most people are more negatively impacted by losses than they are positively impacted by gains.[3] But we’re always here to help take the worry away!
Over the long-term, we expect positive returns from global stock, bond, and alternative markets. Positive returns will not occur every year, but over a long enough time period, we expect these asset classes to continue to have positive returns.[4] We don’t know what will happen for the rest of 2023 or even in the coming years, but we remain optimistic about investment returns over the long term for the future. Staying invested and remaining disciplined in your investment allocation is often the best way to avoid psychological pitfalls and achieve your desired outcomes.
Important Disclosure Information & Sources:
[1] “2023 Market Outlook: Stocks Set to Fall Near-Term as Economic Growth Slows”. J.P. Morgan, 05-Jan-2023, jpmorgan.com.
[2] “US equities 2023 outlook: From inflation to growth“. UBS, 16-Dec-2022, ubs.com.
[3] Thinking, Fast and Slow. Daniel Kahneman, 2011, Farrar, Straus and Giroux.
[4] "Historical Returns on Stocks, Bonds and Bills: 1928-2022". Aswath Damodaran, January 2023, stern.nyu.edu.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Hyperlinks to third-party information are provided as a convenience.
SJS Outlook: Q1 2023
The SJS Q1 2023 Outlook includes our insights on planning for your legacy, tomorrow’s headlines today, how the SECURE 2.0 Act may impact your finances, and looking forward to Q2 2023.
Please click on the image below.
Suggested Reading
Tomorrow's Headlines Today
The market’s reaction to tech in the first quarter is another reminder of how hard it is to time and predict the market, even if you “know” what is going to happen.
By Chief Investment Officer Tom Kelly, CFA.
What if you could get the headlines of the market before everyone else? Do you think it would make you a better investor? Provide you with an edge to get that “superior return” you’ve always wanted? In some cases, perhaps, but in others, I suspect the market’s ability to move unexpectedly could leave you worse off.
What if I told you at the beginning of the year that the largest tech companies would continue their string of layoffs, the bank most tied to serving Silicon Valley technology firms would suffer a bank run and collapse, and central bankers would continue to raise interest rates? Would you have guessed the technology sector in the global stock market (as measured by the MSCI All Country World Index (Gross Div.)) would be up over 20%? Doubtful.
Source: Morningstar, as of March 31, 2023. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets, consisting of 47 country indices comprising 23 developed and 24 emerging market country indices. Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. See Important Disclosure Information.
Certainly, there are other factors at play than the ones above (the expectation of an end to Fed interest rate hikes is likely a large contributor to technology outperformance), but that’s how the market operates. The variables we think matter often don’t (or matter less), and outside events often disrupt or complement even the most well researched thesis.
The market’s reaction to tech in the first quarter is another reminder of how hard it is to time and predict the market, even if you “know” what is going to happen. The moral of the story is that we need to remain diversified and invested, even if we think we know how the story might end.
Important Disclosure Information:
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience.
The Not So Wonderful Bank Run
On the recent bank distress and investment markets.
“I’ve never really seen one, but that’s got all the earmarks of a run.”
The events of this last week reminded me of that famous scene from It’s a Wonderful Life. When my wife asked what was happening in layman’s terms, I said, “It’s like the It’s a Wonderful Life bank run scene, but with venture-backed startups instead of Bedford Falls’ residents and houses.”
“You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here.”
Depositors hold money in a bank for perceived security and to earn interest on their money. Banks then lend out the deposited money, or in some cases, purchase high-quality securities when they are unable to originate enough loans. Loans are often held at book value, or the price it was issued at, and thus are considered held-to-maturity (HTM) assets. While held-to-maturity securities may have unrealized losses, banks typically have other sources of liquidity and likely won’t need to sell them prior to maturity (as the name implies).
“Your money’s in Joe’s house, right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.”
During the COVID crisis, bank deposits shot up to historic levels, due in-part to both the massive government stimulus as well as cutbacks on expenditures for both households and organizations.[1] It takes time for banks to originate loans, and banks were often unable to put these deposits to work for them in such a short period. As a result, banks broadly increased their securities portfolios, buying Treasury securities, mortgage-backed securities, and other assets that were sensitive to interest rates, hoping to earn a yield.[2] Pair that with the sharp rise in interest rates throughout the past 18 months (generally, as interest rates rise, existing bond prices fall), and many banks marked large unrealized losses on their securities holdings, particularly on bonds with longer maturities / durations.[3] The unrealized losses were not only unprecedented from a historical context, but also happened concurrently with negative deposit growth as depositors left banks to seek higher yields elsewhere.[1][4]
Source: “Deposits, All Commercial Banks“. Federal Reserve Bank of St. Louis, 15-Mar-2023, fred.stlouisfed.org.
“I got two hundred and forty-two dollars in here, and two hundred and forty-two dollars isn’t going to break anybody.”
The psychology of a bank run has similarities to the Prisoner’s Dilemma, where cooperation leads to a mutually beneficial albeit slightly suboptimal outcome, but self-interested action from all parties leads to mutual destruction.[5] As depositors take their funds from a bank, part of that bank’s funding goes away, forcing them to sell assets. The Bailey Building and Loan (from It’s a Wonderful Life) nearly went under, had it not been for the honeymoon savings and the kindness of the depositors to take only what they needed.
Contrarily, the depositors at Silicon Valley Bank (SVB) weren’t quite as patient, and nearly caused a collapse of the entire bank.[6] In It’s a Wonderful Life, the Baileys were able to survive the day and close up shop, but in the era of digital banking and instant money movement (not necessarily bad things), SVB depositors could withdraw all their money with a click of a button instead of waiting in line. Fortunately for SVB depositors, they were backstopped by the Federal Deposit Insurance Corporation (FDIC) beyond just the $250,000 insurance, and the FDIC took over leadership of SVB as an FDIC-operated ‘bridge bank’.[7]
“We made it! Look, (as George holds up two bills) look, we’re still in business!”
While a massive crisis seems to be averted, at least for now, the overall dilemma has not been solved by the Federal Reserve’s intervention in recent weeks. While SVB had a concentration of depositors in the venture and technology space, and likely had mismanaged risk by buying too many long-dated securities, the asset-liability balancing act is the core tenant for how a bank works. Trust in the system and rational behavior is ultimately what keeps the banks solvent.
That does not mean that you should rush to the bank, pull out all your money, and stuff it under the mattress. The FDIC for bank accounts and Securities Investor Protection Corporation (SIPC) for brokerage accounts provide moderate levels of insurance.[8][9] Nevertheless, sound financial management from both the banks and depositors as well as regulatory protections are vital.
For example, Charles Schwab - one of our preferred custodians for client assets - has both banking and brokerage businesses, which are required to be held separately.[10] Their brokerage assets are segregated from Schwab assets, and are not comingled with assets at Schwab’s bank.[11] Customer securities - such as mutual funds and ETFs - are segregated in compliance with the SEC's Customer Protection Rule and protected against creditors’ claims.[11] There are also reporting and auditing requirements in place by government regulators. As a result, we believe that there are prudent risk management policies and practices in place at Schwab that help to limit the risk of what happened at Silicon Valley Bank.
We understand the events of the last week may have led to questions, and we are always willing lend an ear and discuss any concerns.
Important Disclosure Information & Sources:
[1] “Deposits, All Commercial Banks“. Federal Reserve Bank of St. Louis, 15-Mar-2023, fred.stlouisfed.org.
[2] “Treasury and Agency Securities, All Commercial Banks“. Federal Reserve Bank of St. Louis, 15-Mar-2023, fred.stlouisfed.org.
[3] “Federal Funds Effective Rate“. Federal Reserve Bank of St. Louis, 15-Mar-2023, fred.stlouisfed.org.
[4] “Historical Returns on Stocks, Bonds and Bills: 1928-2022“. New York University - Stern School of Business, 15-Mar-2023, stern.nyu.edu.
[5] “Prisoner’s Dilemma“. Stanford Encyclopedia of Philosophy, 02-Apr-2019, plato.stanford.edu.
[6] “What Happened With Silicon Valley Bank?“ Telis Demos, 14-Mar-2023, wsj.com.
[7] “FDIC Acts to Protect All Depositors of the former Silicon Valley Bank, Santa Clara, California“. The Federal Deposit Insurance Corporation, 13-Mar-2023, fdic.gov.
[8] “Deposit Insurance“. The Federal Deposit Insurance Corporation, 15-Mar-2023, fdic.gov.
[9] “What SIPC Protects“. Securities Investor Protection Corporation, sipc.org.
[10] “About Schwab - What We Do”. Charles Schwab Corporation, aboutschwab.com.
[11] “Your assets are protected at Schwab“. Charles Schwab Corporation, schwab.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience.
5 Investing Lessons Learned & Re-learned In 2022
The end of the year provides a great time for us to reflect on recent experience to divine lessons to help us going forward.
By Chief Investment Officer Tom Kelly, CFA & Investment Associate Bobby Adusumilli, CFA.
The end of the year provides a great time for us to reflect on recent experience to divine lessons to help us going forward. We want to highlight five lessons that we have learned and re-learned throughout 2022.
Volatility Can Happen Quickly
From a year-to-date performance perspective through November, 2022 has been the worst year for global stocks since the Great Recession from 2007-2009.[1] After more than a decade of positive performance, we knew that global stocks (as measured by the MSCI All Country World Index (ACWI)) having a down year was entirely possible.[1] What has been particularly unusual about 2022 is that U.S. bonds (as measured by the Bloomberg U.S. Aggregate Bond Index) have experienced their worst calendar year performance in the history of the index going back to 1976.[2]
Stock market volatility is to be expected - it is one of the trade-offs in pursuing higher expected returns, as this graph demonstrates:[1]
Source: Morningstar, as of November 30, 2022. Returns are based on total return of the MSCI All Country World Index, which is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. See Important Disclosure Information.[1]
In comparison, bond markets typically have much lower volatility than stocks. However, due to higher-than-expected inflation in 2022, the U.S. Federal Reserve has raised interest rates dramatically throughout 2022, which has led to an upward shift in interest rates across maturities:[2][3]
Source: Department of U.S. Treasury, as of November 30, 2022. See Important Disclosure Information.
As a consequence of the rapid increase in U.S. interest rates, existing U.S. investment grade bonds have had to decline in price in order to compensate prospective investors to buy existing bonds versus new bonds with higher interest rates. This is partially why the U.S. investment grade bond market has suffered this year:[2]
Source: Morningstar, as of November 30, 2022. Returns are based on total return of the Bloomberg US Aggregate Bond Index, which is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. See Important Disclosure Information.[2]
Unfortunately, it is very difficult to know when volatility will occur and what changes to make to investment portfolios ahead of time. While sometimes client portfolios experience short-to-medium-term pain, we believe that strategically designing portfolios for the long-term is most likely to benefit the majority of our clients.
For Investment-Grade Bonds, Duration Is Critical
While current yield is a good predictor of return for investment-grade bonds over their maturities (which tend to be higher-quality bonds with low expected risk of default), duration is the most important factor that influences investment-grade bond prices over the short-term.[4] Duration measures a bond portfolio’s price sensitivity to interest rate changes. Because interest rates have risen dramatically throughout 2022, higher-duration bonds have experienced significantly worse performance than shorter-duration bonds in 2022:
Sources: Morningstar, S&P as of November 30, 2022. Duration measures a bond’s or fixed income portfolio’s price sensitivity to interest rate changes. The S&P indices are broad, comprehensive, market-value weighted indices that seeks to measure the performance of their respective markets. See Important Disclosure Information.
Given recent performance, you may be wondering: if the U.S. Treasury yield curve is nearly flat, meaning investors are getting paid nearly the same interest regardless of maturity, why would you buy longer-term bonds? There are two important factors to consider:
The future is uncertain. It is very difficult to predict how interest rates will change relative to what the market is already pricing in. With longer-duration investment grade bonds currently yielding higher than the market’s priced-in expected inflation rates, we think it makes sense for long-term investors to have some exposure to longer-duration bonds.[5][6] Additionally, shorter-duration bonds have reinvestment risk, meaning that if interest rates have fallen by the time the bond matures, then new bonds may have to be purchased at lower interest rates. Longer-maturity investment grade bonds can allow you to “lock-in” an interest rate for longer.
If / when the U.S. Federal Reserve reduces interest rates, longer-duration bonds will likely benefit more in price compared to shorter-duration bonds.
As investment advisors, we continuously monitor duration and credit quality across the bond investments that we recommend. While this year has been rough, we believe the outlook is significantly brighter for bond investors.
Alternatives Are Becoming More & More Important
Alternative investments include asset classes that behave differently than publicly-traded stocks and bonds. Some of these asset classes include private equity, private debt, real estate, infrastructure, natural resources, insurance / reinsurance, and other more complex trading strategies.
High-quality alternative investments have historically been primarily offered to ultra-high net worth institutions and families. Many of the world’s top investors have had significant allocations to alternatives for decades.[7] With advances in investment technology, more and more investors now have access to alternative investments. As a result, the demand for alternative investments is expected to increase in the coming years.
Alternative investments have important tradeoffs to consider. They typically cost more in fees, are more complex, and are less transparent compared to publicly-traded stocks and bonds. Additionally, alternative investments often have lock-up periods, tax inefficiencies, and usually involve more account management. As a result, it is critical to do thorough due diligence before choosing an alternative investment.
In late 2021, SJS added the Stone Ridge Diversified Alternatives Fund (SRDAX) to MarketPlus Investing models.[8][9] While the timing was fortunate given the recent struggles of publicly-traded stocks and bonds, we believe that alternative investments can provide meaningful diversification benefits to client portfolios over the long-term.[8] We are focusing most of our investment research and due diligence efforts on alternatives, with the hope of finding more beneficial investments for our clients.
There Is Always Something Smart To Do
Even when stocks and bonds are struggling, there are smart things that investors can do to potentially help their investment portfolios over time:
Rebalancing means selling investments that are higher than your target allocations, and buying investments that are under-allocated, with the goal of maintaining your target level of risk.
Tax loss harvesting for taxable accounts allows for realized net capital losses to be used to offset current / future capital gains, sell investments that you no longer want to hold, and offset up to $3,000 of your federal taxable income for the current year and future years.
Adding to investments that have attractive expected risk/return characteristics. For example, we believe that allocating to what we think are high-quality alternative investments may be able to help client portfolios over time, though there are no guarantees. Additionally, we previously wrote about Series I Savings Bonds, which are bonds offered by the U.S. government that pay you interest based on the CPI-U inflation index.
Revisiting asset location, which involves placing the most tax-inefficient investments in tax-advantaged accounts. For example, most alternative investments tend to be tax-inefficient, paying high amounts of dividends, interest, and capital gains. Therefore, we have prioritized placing these alternative investments within tax-advantaged client accounts when possible.
Long-Term Investors Have An Advantage
One theme that shows up over and over again in research and our experience with clients is that investors with long time horizons (10+ years) have an advantage over those with short time horizons (<5 years) when it comes to withstanding volatility in order to capture market performance over time.[10][11] Beyond just their time horizon, we have found that investors who are able to keep recent events within perspective of long-term history are better able to stay committed to their investment plan even in the midst of difficulty. For example, despite experiencing 15 recessions, societal changes, and periods of political difficulties, the U.S. stock market (as measured by the S&P 500) has still grown over 10,000-times its initial value from January 1926 through November 2022, as depicted in this graph:
-Sources: NBER, Morningstar, as of November 30, 2022. Recession start and end dates are based on the US Business Cycle Expansions and Contractions data from the NBER. Gray shaded areas represent periods of recession. The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. The S&P 500 total return index assumes reinvestment of all distributions. See Important Disclosure Information.
While there are no guarantees that the stock market going forward will experience positive performance like the past, we believe in the global economy and innovation. As a result, we believe that stocks and bonds can continue to provide positive returns over the next 10+ years on average, though volatility will cause year-to-year performance differences. While nothing is certain, we are optimistic about the future.
Important Disclosure Information & Sources:
[1] Source: Morningstar, Dimensional Returns Web, as of November 30, 2022. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets.
[2] Source: Morningstar, Dimensional Returns Web, as of November 30, 2022. The Bloomberg US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.
[3] “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average“. Federal Reserve Bank of St. Louis, 30-Nov-2022, fred.stlouis.org.
[4] “SJS 2021 Capital Markets Expectations: Making Sense Of The Future“. SJS Investment Services, 04-Feb-2021, sjsinvest.com.
[5] “5-Year Breakeven Inflation Rate“. Federal Reserve Bank of St. Louis, 30-Nov-2022, fred.stlouis.org.
[6] “10-Year Breakeven Inflation Rate“. Federal Reserve Bank of St. Louis, 30-Nov-2022, fred.stlouis.org.
[7] Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. David Swensen, 2009, Free Press.
[8] “Stone Ridge Diversified Alternatives Fund“. Stone Ridge Asset Management, stoneridgefunds.com.
[9] MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost. There are limitations inherent in model allocations. In particular, model performance may not reflect the impact that economic and market factors may have had on the advisor's decision making if the advisor were actually managing client money. Not to be construed as investment advice.
[10] “Quantitative Analysis of Investor Behavior“. DALBAR, dalbar.com.
[11] “Are Stocks Riskier Than Bonds?“ Bobby Adusumilli, 07-May-2021, sjsinvest.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Hyperlinks to third-party information are provided as a convenience.
The Gold Rush?
History has shown that over long periods of time, gold has often failed to outpace inflation, even before considering fees.
By Chief Investment Officer Tom Kelly, CFA.
We all like to consider ourselves investors, but sometimes find ourselves speculators. It can be exciting to predict, tinker, and attempt to outsmart, trying to find the golden opportunities to strike it big. Sometimes it pays off, but many times it leaves us emptyhanded. Good investing is often boring: global diversification in cash flow-producing companies; holding for the long-term; patience in valuations. Anyone can do that, right? Many can, but few do.
Take, for example, the parties in the California Gold Rush of the mid-1800s. Prospectors from all over the world went to California with the hopes of finding that illustrious metal; few made it big, while most ended up with nothing.[1] However, retailers selling the prospecting supplies, merchants, and transporters benefited greatly from the growth of the economy. Samuel Brannan was said to be the wealthiest man in California at the time.[2] His profession? Publicizing the Gold Rush in newspapers and running a store selling picks, shovels, and pans. The difference in investing vs. speculating.
While you might have thought we learned our lesson, the original 49ers aren’t the only speculators in gold. To a large extent, the gold bugs of today are just as starry-eyed as those of the past, betting on gold as an inflation hedge. However, history has shown that over long periods of time, gold has often failed to outpace inflation, even before considering fees. Just look at inflation (as measured by the CPI-U index) vs. gold (as measured by the gold spot price from Bloomberg) returns since 1980.[3][4]
Sources: Morningstar, as of September 2022. Inflation is represented by the Consumer Price Index for All Urban Consumer (CPI–U), not seasonally adjusted. The Gold Spot Price is based on USD returns from composite prices from Bloomberg. See Important Disclosure Information.[3][4]
Since 1980, gold has failed to live up to its luster as an antidote to inflation. The U.S. stock market (as measured by the S&P 500) on the other hand: up nearly 9,000% over that same period.[5] However, it is important to note that the S&P 500 has had periods of up to 17 years when it has underperformed CPI-U inflation on an annualized basis.[6] Nonetheless, while past performance is no guarantee of future results, this may be a lesson the next time you hear others panning the stock markets.
Important Disclosure Information & Sources:
[1] “California Gold Rush“. History.com Editors, 10-Aug-2022, history.com.
[2] “Samuel Brannan: Gold Rush Entrepreneur“. PBS, pbs.org.
[3] The Consumer Price Index for All Urban Consumers: All Items (CPI-U) is a price index of a basket of goods and services paid by urban consumers, including roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force. Returns data sourced from Morningstar.
[4] The gold spot price is measured by composite USD price returns as measured by Bloomberg. Returns data sourced from Morningstar.
[5] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. Returns data sourced from Morningstar.
[6] “Are Stocks Riskier Than Bonds?“ Bobby Adusumilli, 07-May-2021, sjsinvest.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience.
MarketPlus Investing
Video on our MarketPlus Investing philosophy.
Important Disclosure Information:
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
MarketPlus Investing® portfolios consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Statements contained in this video that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Suggested Reading
Market Corrections & Market Highs
We believe that trying to time when to get in and out, or what to buy and sell, represents little more than gambling.
By Chief Investment Officer Tom Kelly, CFA.
In 2021, the global stock market (as measured by the MSCI ACWI Index) continued to reach new high after new high, but this year is off to a different start.[1][2] After the slow and steady rise in 2021, the rather opposite slow and steady fall occurred throughout the first quarter of 2022.[1] Though some recovery happened in the last three weeks, market headlines continue to point out all the things to worry about such as war, inflation, and recession.[1] Challenging times may be ahead, especially with the continued conflict between Russia and Ukraine.
While not diminishing those challenges and the people affected, it may be an opportune time to take a step back for a wider perspective. When looked at as a whole, the stock market can sometimes seem tame and uninteresting during times of lesser volatility, and all fraught with despair during periods of higher volatility and drawdowns. However, the drawdown of 13% so far this year for the global stock market is not uncommon at all, and we often see intra-year drawdowns well into the double digits even when the end-of-year returns end up positive.[2] Over the last 20 years in the global stock market, intra-year drawdowns averaged 16%, yet calendar year returns were positive in 15 out of 20 of those years.[2] A gentle reminder to stay the course.
Source: Morningstar. See Important Disclosure Information.[2]
It is interesting to note that the “market” as a whole often masks the ups and downs of its individual stock components. Within the MSCI All Country World Index, 94% of the nearly 3,000 companies experienced a drawdown of at least -10% during 2021, and about half drew down 25% or more.[2] This in a year when there was lower volatility, limited geopolitical events, and the global stock market as a whole up 19%![2] This suggests the value of broad diversification.
When evaluating the underlying returns, there is often plenty to worry about and temptation to tinker. We believe that trying to time when to get in and out, or what to buy and sell, represents little more than gambling. MarketPlus Investing on the other hand is a disciplined process, centered around research and evidence, with diversification at the core.
Important Disclosure Information & Sources:
[1] “SJS Weekly Market Update”. SJS Investment Services, 2021-2022, sjsinvest.com.
[2] Morningstar. The global stock market is represented by the MSCI ACWI Index, which is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI Index consists of 47 country indices comprising 23 developed and 24 emerging market country indices.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
The Certainty of Uncertainty - Your Investments During Geopolitical Events
On the conflict in Ukraine, how that may impact investment markets, and what you can control within your investment portfolio.
By Chief Investment Officer Tom Kelly, CFA.
With conflict between Russia and Ukraine escalating in recent days - unfortunately leading to an invasion and war between the nations - we are reminded of the never-ending risks in the world.[1] Just as the light at the end of the tunnel of the pandemic begins to appear, the next global challenge presents itself. The only thing predictable is the unpredictability of the world.
From an investment perspective, global ramifications of war are certainly hard to determine. Military events - just like economic disruptions, natural disasters, and social turmoil - affect the stock market in many unpredictable ways. The tendency for investors is to try to predict and adjust based on events, but we believe markets are continually pricing in expectations and likelihoods of further developments, whether positive or negative.
One of the hardest things to do as an investor is to stay invested and committed to your investment plan, particularly during periods of great uncertainty. However as this graph demonstrates, markets have rewarded investors over long periods of time.[2] In our experience, the discipline to stick to their investment plan through the periods of greatest uncertainty often differentiates great investors from the rest.
Source: Morningstar Direct, S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. See Important Disclosure Information.[2]
Unfortunately, there have been many major armed conflicts over the last century to look to and see how markets might behave. As this table demonstrates, both US stock and bond markets still achieved positive returns during the years associated with major wars of the past.
Sources: “What Happens to the Market if America Goes to War?“ Mark Armbruster, cfainstitute.org. Dimensional Returns Web. The indices used for each asset class are as follows: the S&P 500 Index for large-Cap stocks; CRSP Deciles 6-10 for small-cap stocks; long-term US government bonds for long-term bonds; five-year US Treasury notes for five-year notes; long-term US corporate bonds for long-term credit; one-month Treasury bills for cash; and the Consumer Price Index for inflation. All index returns are total returns for that index. Returns for a war-time period are calculated as the returns of the index four months before the war and during the entire war itself. Returns for “All Wars” are the annualized geometric return of the index over all “war-time periods.” Volatility is the annualized standard deviation of the index over the given period. Past performance is not indicative of future results. See Important Disclosure Information.
For investors historically, wars have not been detrimental to long-term investment performance. We do not believe the current situation will be detrimental to long-term investors going forward. While no two conflicts are the same - and each more unfortunate than the last regarding the continued loss of human life and havoc on nations - humanity (and the markets) remain resilient. Industry and innovation continue. We hope and pray this time is the same.
For those who have a sound, diversified, personalized investment plan in place, we do not believe that now is the time to make any major changes. Instead of focusing on how external forces that you do not control may impact your investments, we recommend that you focus on what you can control. For our clients, we are doing the following on your behalf:
Investing, Not Speculating
As anyone who invested through the COVID-19 pandemic knows, investment markets can be highly volatile, and regularly move in ways that we don’t expect.[3] Instead of making it up as we go along, we think that creating an investment plan ahead of time and sticking to it during down markets is most likely to benefit most investors over the long-term. We believe in long-term investing, not short-term speculating.
Rebalancing
During most volatile market periods, stocks tend to be more negatively impacted in the short-term compared to bonds. Therefore, you can potentially rebalance back to your target allocations by selling some bonds and buying some stocks. This can allow you to buy stocks when they are at lower valuations as well as rebalance your total portfolio to its target risk allocation, which may potentially help improve your risk-adjusted expected returns over the long-term.[4]
Tax Loss Harvesting
Volatile investment periods tend to provide more tax-loss harvesting opportunities within taxable accounts. You can potentially sell an investment now at a capital loss and buy a similar (though not a “substantially identical” investment per the Wash Sale Rule) investment.[5] Then in the future, you can realize capital gains in your taxable accounts and use the past capital losses to lower your tax burden, which can potentially increase long-term after-tax expected returns.
We don’t know what will happen, but we will control what we can in efforts to help your investment portfolio. As always, if you have specific questions or concerns related to your portfolio, please call us. We’re always here to listen and assist.
Important Disclosure Information & Sources:
[1] “Russia Invades Ukraine, Aims to Oust Leadership“. By Yaroslav Trofimov, Alan Cullison, Brett Forrest, & Ann M. Simmons, 24-Feb-2022, wsj.com.
[2] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.
[3] “Started From the Bottom”. Nick Maggiulli, 23-Mar-2021, ofdollarsanddata.com.
[4] “Opportunistic Rebalancing: A New Paradigm for Wealth Managers.” Gobind Daryanani, fpanet.org.
[5] “Wash-Sale Rule“. Jason Fernando, 17-Feb-2022, investopedia.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Tax Smart Considerations Before Year-End
In collaboration with your SJS Advisor and other trusted professionals, here are some tax smart things you can consider before year-end.
By SJS Investment Services Chief Investment Officer Tom Kelly, CFA.
“Death, taxes and childbirth! There's never any convenient time for any of them.” ― Margaret Mitchell, Gone with the Wind.[1]
While there never seems to be a good time to talk about taxes, the topic has been unavoidable this year. With a $large infrastructure plan in the works, the House Ways and Means Committee recently introduced a draft bill advancing many tax proposals, such as raising the top long-term capital gains tax rate from 20% to 25%, a potential net investment income tax of 3.8%, and increasing the top individual federal income tax rate from 37% to 39.6%.[2][3] While none of these are set in stone, the right time to talk about taxes is now!
In collaboration with your SJS Advisor and other trusted professionals, here are some tax smart things to consider before year-end:
Tax-Deferred Contributions
Contribute the maximum amounts to tax-deferred retirement accounts - including 401(k), Individual Retirement Account (IRA), and Health Savings Account (HSA) - to reduce your taxable income.
Roth Conversions
With your SJS Advisor and trusted tax professionals, identify if there are opportunities to accelerate income into 2021 through a Roth Conversion.
Charitable Donations
Gifting of highly appreciated securities held for more than one year, either directly to a qualified charity or to a charitable fund. You could reduce taxable income and avoid realizing capital gains on those donated securities.
Estate Planning
With your SJS Advisor and trusted estate professionals, review your estate and financial plans to understand how you are positioned to achieve your financial and legacy goals
While we may have just added a few things to your to-do list, know that SJS has been reviewing opportunities on your behalf throughout the year. Using our MarketPlus Investing principles and our disciplined approach to long-term investing, we strive to manage tax-efficient portfolios by utilizing asset location (putting tax-disadvantaged investments in tax-advantaged accounts), tax-efficient investments (using mutual funds and ETFs with low capital gains distributions), and tax loss harvesting (realizing losses in order to offset future realized capital gains). We are always looking for ways to decrease your April 15th bill. Wherever taxes go in the future, we will continue to be here for YOU. All the time. Every time. At whatever time is convenient for you.
Important Disclosure Information & Sources:
[1] “Margaret Mitchell > Quotes > Quotable Quote“. Goodreads, goodreads.com.
[2] “What’s in Democrats’ $3.5 Trillion Budget Plan—and How They Plan to Pay for It“. Wall Street Journal Roundup, 09-Aug-2021, wsj.com.
[3] “How House Democrats Plan to Raise $2.9 Trillion for a Safety Net“. Emily Cochrane & Alan Rappeport, 13-Sep-2021, nytimes.com.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
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