Oct. 27, 2022

Having the Courage to Stay Invested

Having the Courage to Stay Invested

Questions we are receiving these days are focused on recessions, stock versus bond returns, inflation, and global macro events. Stock and bond markets continue to show negative returns. Central banks have been focused on monetary policy and have raised interest rates substantially since the beginning of the year.  The monetary policy being implemented is to curb Inflation, as inflation numbers continue to run at a four to five decade high. Has this monetary policy of interest rate hikes directly led us into a recession?

 

Are we in a recession? 

The accepted definition of a recession is two quarters of negative GDP growth. According to that definition then the answer is yes. A recession has not officially been called out but that doesn’t mean that it isn’t happening.  Recessions are lagging indicators of what has happened. Calculating data based on the last few quarters is lagging data.

 

How have markets fared during and after a recession?

There have been 11 recessions in the US since 1953.  Each of those previous recessions lasted 11 months on average.  During each of those recessionary times investors would have had the same questions as they do now. What is going to happen?  What should we do about it? The answer is one that most people inherently already know. If you stayed invested, stayed the course, then your portfolio would have rebounded from each of those previous recessions.

 

Will stocks (equities) go back up in value? 

We would expect so, at least according to all the data from all previous market corrections.  Each time the stock market has sold off during a previous correction it has returned to its previously set high water mark, and then they have continued to grow further.  The opportunity in stocks currently is a buying opportunity. If you went to the store and that item, you wanted to buy was 20% cheaper than it was 6 months ago you might be inclined to think that it is a better deal. Why would stocks be any different?   

 

Fixed income (bonds) and equities (stocks) asset classes are fundamentally different though. Bonds are simply loans that have defined lives to them, they are finite. At the end of the loan period the principal is returned to the investor and during the loan period interest payments are made to the investor. The stock market has no end date, no formal period, it can trade in perpetuity. The stock market also has a much higher expected rate of return than the bond market, which is why investors tend to have significant investment in stocks!

 

Why have bond prices gone down? Will they go back up?

The price of bonds that are currently trading on the market moves inverse to the movement of interest rates. We have had substantial interest rate hikes during 2022.  As interest rates have moved up any new bond offerings are priced with higher coupon (interest) payments. This adjusts the demand curve for bonds that are already trading in the markets. If you can buy a new bond that offers a higher interest payment, then you may not want to own a previously issued bond with a lower interest payment. This leads to the price of the old bonds going down.  But remember, each of those old bonds that is now trading at a lower price, have maturity dates. So, what should you do with the old bonds?  You should hold them to maturity, collect interest payments during the life of these older bonds, and be rewarded a par value at maturity. 

 

Why are my bonds down along with my stocks? 

The normal relationship between stocks and bonds is inverse. During ‘normal’ times these two asset classes move inverse to each other. However, during times of extreme volatility, these two asset classes can become correlated for a short period of time and move in the same direction. This is what has happened in 2022, during a period of excess volatility, the price of bonds has dropped along with the price of stocks. The same event happened during the Global Financial Crisis of 2009.

 

Stay the course!

Everyone should be commended for the courage it has taken to stay invested during this current bear market, this current correction.  It takes courage to decide to not look at your statements for awhile, to turn off the news channels, to ignore the headlines. History doesn’t repeat itself, but it certainly can rhyme. Lesson from the past show us what to do now and in the future. Imagine for a minute that you sold out in 2009 during the last major crisis. Where would you be today? What gains would you have given up by doing that? TINA (there is no alternative) when it comes to investing. Your choices are either to be invested, or to be on the sidelines watching. The problem with being on the sidelines is that things can change quite quickly. If you are waiting for things to get better it means that you are most likely going to be buying back into markets that are now priced much higher, meaning, you may have missed out on some, or a substantial amount, of the recovery.

 

Stay well, stay safe and stay invested!

Colin Andrews, MBA