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Can you keep a secret?  Markets are rebounding!
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Pain and uncertainty that investors felt in 2022 seems to be lifting.  Over the past 12 months and without fanfare, the total US stock market is up 19%.

While the world still awaits a recession, we, as long-term investors, see several nearer-term developments that keep us diversified and patiently optimistic.

Even if a mild recession should materialize, the recovery could be stronger than expected.  If a recession is already “priced into the markets,” current discounting might put more bounce into a subsequent recovery.

Last year’s market volatility hastened a flight to cash for many investors – leaving more investor dollars “parked on the sidelines” than either the pandemic or the 2008 Financial Crisis.  More cash returning to the markets should lift stock prices further.

Foreign Bargains

In contrast to booming US markets, the stocks of developed nations have long disappointed – until lately. Without fanfare, foreign stocks in developed nations have quietly increased 17% over the past year.

By traditional metrics, foreign stocks have been selling far more cheaply than US companies. In particular, Europe – despite the Russian invasion of Ukraine – has shown remarkable resiliency: modest domestic growth (e.g., travel and consumer spending) as well as international opportunities.  This includes the reopening of the world’s second-largest economy, China (regardless of how we view its government).  

Think of European companies familiar to Americans: Nestlé (Switzerland) conducts 76% of its business outside Europe; Airbus (France), 59%; and drug manufacturer Novo Nordisk (Denmark), 91%. Though domiciled abroad, these brands illustrate the globalization of solid investment opportunities. 

Given comparative valuations, we have increased our allocation in foreign stock over the last three years.  There have been prior decades when foreign stock returns outpaced US markets by a mile – too many statistics to share here, but they are available if you should contact our office.

Reducing inflation, lifting bonds - maybe

The rate of inflation ratchets downward, and the Federal Reserve tentatively pauses interest rate hikes. In as early as two years, we might return to the low inflation we had known prior to the pandemic – according to a common technical analysis of the gap between short- and long-term interest rates.

Low inflation is a universal good. For investors, it’s extra nice for their stock and bond holdings.  If interest rates stay even or, better, come down, the bond portion of our portfolios might see a good return after several disappointing years and a historically dreadful 2022.  

Looking ahead, though, one might consider the historic resiliency of bonds once the Fed stops raising rates. Between 1977 and 2018, there were eight rate-hiking periods. In the first and second year after those periods, bonds averaged returns of 13.2% and 12.6%, respectively. Future results will vary. 

This newsletter touches upon three broad asset classes: US stock, foreign stock, and bonds. They are subdivided as we typically employ ten refined asset classes when customizing a client portfolio. 

To ask how any one class “should” perform in one or five years is a testament to the randomness of returns, the reason we remain diversified and patiently optimistic about the portfolio as a cogent whole.  Could we have predicted one year ago the investment returns that we are reviewing today?

In simpler terms, we ultimately seek a steadier, less volatile return for clients rather than grasping the next shooting star or stuffing cash into the mattress.   We believe we are on the correct path.
 
We welcome your investment and financial planning questions.  From our perspective, it’s all opportunity.

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