To our clients and associates,
“We need to face reality as it is, not as it was or as we wish it to be.” Jack Welch, Former GE CEO
By now you have seen the news: This has been the worst first-half of the year for the US stock market in the last 52 years. It’s true. The first half of this year saw the S&P 500, an index of the biggest and best 500 companies based in America, drop 21.1% from its record high. Similarly, the first half of 1970 saw a reduction of 21%.
While the past is no indication of the future, it is interesting to note that the second half of 1970 saw a 26.5% gain! I share this to bolster my strong recommendation to hold your nose and your positions because we never know when the market will turn around.
It’s certainly fair to ask about the relative “safety” of bonds. Historically, bonds, especially US Treasury bonds, have provided a degree of stability against the volatility of the market. Unfortunately, the dual poisons of high inflation and rising interest rates have spoiled any opportunity for seeking shelter there. The Wall Street Journal reports that investment-grade bonds, as measured by the iShares Aggregate Bond Index, lost 11% - “posting their worst year in history.” (emphasis added).
Once again, cash, money market funds and CDs at best only provide a smokescreen of safety in that their 1.0% yields pale in comparison to 8.5% inflation. Moving to these resources would only lock in losses and prevent the opportunity for a portfolio to recover.
Here’s some light at the end of the tunnel that may not be a train coming at us - again from the WSJ: “When the S&P 500 has fallen at least 15% the first six months of the year, as it did in 1932, 1939, 1940, 1962 and 1970, it has risen an average of 24% in the second half, according to Dow Jones Market Data.” And Kiplinger’s Personal Finance (07/02) reports that, “Looking back some 65 years, Deutsche Bank found that 12 months following the first rate hike, the stock market was up 91% of the time, by an average of 7%.”
You may ask: What is being done at Wooster Corthell? Much happens behind the scenes at times like this. As always, we analyze client accounts and portfolios to take advantage of potential tax loss harvesting opportunities. This function reduces taxable gains allowing you to keep more of the appreciation your portfolio has earned. In addition, we rebalance accounts to ensure that your allocations to stocks and bonds stay within your risk profile. This worked well for clients when Covid dropped the market hard in February and March of 2020. As a reminder, rebalancing has the effect of creating a sell-high, buy-low discipline without the emotion created by volatile markets.
And finally, we are actively evaluating client portfolios for those who may benefit from conducting a Roth conversion – moving assets in-like-kind from a Traditional IRA while valuations are low, into a Roth IRA where those same assets are able to grow tax-free. This process has the additional positive effect of lowering the eventual Required Minimum Distributions (RMDs) of retirees, which may not only reduce taxes at that time, but also avoid huge jumps in Medicare Part B and D premiums.
This past Thursday was the 30th anniversary of the start of my business. While that is a very long time, I still can’t say I have seen it all. Yet I am confident that the challenges facing us today (inflation, rising interest rates, war) while horrible, are truly no worse than anything we’ve ever experienced. Keep in mind, we even survived a pandemic!
The steps we are using to mitigate these circumstances and prepare for an eventual turn-around have worked in the past. I am confident they will serve us well into the future.
By the way, on June 30, 1992 - the day I founded our business - the S&P 500 closed just over 408. Exactly thirty years later, the closing price was over 3,785!
(As you know, past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.)
My very best to all of you!
Past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.