Markets have been volatile since our last update – something we mentioned we were due for in our prior letter. Major stock indexes (S&P 500, Dow, Nasdaq) are down 8 - 16% from recent all-time highs and we are seeing a large dispersion in returns among different asset classes. Small growth (mostly tech and healthcare) companies in the U.S. are down more than 20% since the beginning of November. Aggressive growth companies are down even more. However, companies that are more value oriented (financial and energy) have performed better over that same time period.
Volatility in markets is normal and historically a 14% decline during the year is common even though the stock market is up over 75% of the time. We think of volatility (risk) as the price we pay for higher returns over time. Because of the risk of declines, it's important to plan for these events as they can allow for good long term investments. We have rebalanced segments of our portfolios to take advantage of these prices and will continue to monitor markets going forward.
So, why are we seeing these price movements? Interest rates! We have all experienced rising prices (inflation) in one way or another over the last year. In fact, the recent economic report from the Bureau of Labor statistics indicated an inflation rate of 7% over the last 12 months, which is the largest increase since 1982. A high level of inflation is not good for an economy and to slow that down the Fed will look to raise interest rates. We are already beginning to see interest rates rise. On November 1st, the 10-year government bond was paying 1.45% and now it’s paying 1.72%. Rising rates will slow down growth and that is why we are seeing stock prices come down, but the Fed wouldn’t raise interest rates without indication that the economy is strong and can handle the increases. Bonds also struggle when interest rates rise and bond prices have declined a little over 1% so far this year. Interestingly, the stock market has averaged a 12% rate of return in years where the Fed begins hiking rates.
When we look at the economic data, we see a lot of good news. Business confidence is at an all-time high, consumers have paid off debt and have money to spend, the labor market is strong and improving, supply chains are starting to improve, and the economic impacts of COVID seem to be less severe. While we do expect some economic disruption from COVID in the first quarter, we will be closely monitoring earnings results in the coming weeks to evaluate how growth will be impacted.
We appreciate the trust you’ve placed in us to help you navigate the markets. If you’d like to discuss your personal investments outside of your normally scheduled review, please don’t hesitate to reach out.
We are excited to announce we are growing and hiring! We plan to introduce new members of the team to you soon. In the meantime, Justin's daughter Emma is learning how to prepare for a secure retirement. Our succession plan is coming along!