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  • Writer's pictureMilo F. Hanke, CFP

All-Weather Investing is Scenario Planning — But What Now?

There is no way to candy-coat things.  

Major declines in financial markets reflect a world of hurt and uncertainty: war in Ukraine; mass shootings here; spiking inflation and interest rates; prospects of recession - all atop the lingering effects of the pandemic.   Any painful event not listed here is amplified on the news channel of your choice. A citizen with a heart would care and might remain anxious.  So, to face a world seemingly gone mad, we suggest our best-kept trade secret: 1) know what’s important and 2) know what you can control or influence. Where the two intersect, train your attention.  Investors have experienced the rare double whammy of stock and bond prices dropping at the same time.  From March 1979 through June 2022, only 8% of quarters produced negative returns for both US stocks and US bonds (15/174 quarters).Periods like we now see have precedent. We all know the risk-and-reward proposition.  Still, present conditions feel uncomfortable.  The question becomes what to do now?  Most often it adds up to a well-informed act of essentially sitting still,  we’re not stoics yet we strongly believe emotional decisions are the surest way to lose money. 

Hopscotch Doesn’t Pay

History shows markets have rewarded long-term investors. Think back to just two years ago. In March of 2020, the S&P 500 Index declined 33.79% from the previous high as the pandemic worsened.  Even if investors were able to time getting out of the market, they were probably unable to correctly time getting back in.  The S&P 500 Index jumped 17.57% from its March 23 low in just three trading days. Investors who had fled to cash to try to time the market would have lost significantly.

Not Monetary Armageddon

As always, there are many headlines with frightening narratives; but which ones are relevant?  The Federal Reserve has also been getting attention recently as it announced plans for a series of rate increases to combat inflation. 

On average, historically that is, US stock market returns are reliably positive in months with increases in the Fed rates. Similarly, within bond markets, periods of rising rates do not necessarily result in negative returns.   

Looking back to the 1960s, the interest rates for long-term US treasury notes hovered between 3% and 6%, and that decade proved a good investment environment, indeed “go-go” years.  

Interest rates had been trending downward for 40 years.  Though heading up, interest rates are still below historic averages and should not clobber the economy – over the long term:   

(Sources: Capital Group, Refinitiv Datastream. Data shown as of 6/23/2022.)

Recessions & Their Uses

With apologies to anyone striking for higher wages, struggling to find work, or just scraping by, we offer an unpopular viewpoint:  a moderate recession over the next year or two would be healthy, perhaps necessary to balance things out, to purge the excesses of the past decade.  Periods of uninterrupted growth and cheap borrowing produce systematic imbalances, for instance in the real estate market elsewhere. 

FOMO (Fear of Missing Out) Meets Schadenfreude

After riding a years-long wave of investor euphoria, cryptocurrencies have tanked.  Celebrity endorsements included a Super Bowl ad featuring Matt Damon who likens crypto to the advent of aviation.  Then the “perfect storm” hit. Bitcoin ended this quarter down more than 70% from its high last November.  

So-called “stablecoins” have also proven highly volatile as they failed to stay even with the US dollar.  A cryptocurrency lender funded by tech billionaire Peter Thiel suspended operations after a “run on the bank.” Sadly, the typical crypto investor is a young, lower-income male.  With a blast of schadenfreude, a New York Times headline reads, “All Those Celebrities Pushing Crypto Are Not So Vocal Now.”

Future Results Will Very and When You Least Expect

Tech giants lumped under the acronym “FAANG” -- Facebook, Amazon, Apple, Netflix, and Google -- have posted especially disappointing returns this year. These stocks collectively plunged about 10% more than the broader market this year.  Despite their current stock price, these Bay Area darlings remain excellent global franchises.  FAANG's worse-than-average stock performance warns against assuming that past returns will continue in the future.   (Reflecting forces racking the world economy, oil behemoth Saudi Aramco in May overtook Apple as the most valuable company on the planet.)  

In a Consistently Random World, Consistently Diversify

When a bear market recedes, a new economic sector typically emerges at the top position.  And it’s not necessarily the same industry that led on the way down. For instance, in the current environment, energy stocks have staged a remarkable rally. We do not think the energy sector is going to drive the next bull market.  

The following chart shows the repositioning of industry leaders and laggards through two recent bear markets. For instance, note the “before” and “after” rankings of flashy information technology versus boring utilities.   Bottom line: consistently random results underscore the value of portfolio diversification:  


Sources: Capital Group, MSCI, Refinitiv Datastream. Returns are absolute total returns in U.S. dollars. The periods covered are: the tech bubble, December 31, 1996 to May 31, 2000 (before bear market) and September 30, 2002 to December 30, 2005 (after bear market); the global financial crisis, December 31, 2003 to September 28, 2007 (before) and May 31, 2009 to December 31, 2013 (after); and the current market, December 31, 2021 to May 31, 2022.

Scenario Planning

In times like these, long-term investors – this includes citizens with caring hearts and sometimes anxious souls – best take a tempered approach as turbulences pass.  The diversified, “all-weather” portfolio best anticipates randomness, including major market drops that occur on average every five years.  Thought of in another way, diversification is scenario planning – readiness for arrhythmic events.

Our firm integrates the client’s unique needs into a plan to stick with in good times and bad. We can help determine if adjustments are indicated, such as rebalancing or tax-loss harvesting.

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