If there’s a consistent theme in financial markets, it’s that “nobody knows anything” (at least in the short run). So far, 2023 is a great example of this.
Let’s start the tour in Europe. It was a seemingly foregone conclusion that Russia’s invasion of Ukraine would spell doom for European markets. In fact, France and Germany have been the world’s top performing stock markets, and by a wide margin. This is certainly not an outcome anyone had on their bingo cards last spring!
Next, let’s take a look at interest rates. It seems like ancient history, but as recently as last March the effective US Fed Funds rate was 0.25%. It was at that March 2022 meeting that the Federal Reserve decided to raise rates by a modest quarter point. The Fed also produces a famous “dot plot” chart that displays the predictions of the Fed governors themselves – the very people in charge of setting interest rates. In March of 2022, most of them saw 2023 rates settling in between 2% and 3%, with only a few dissenters predicting rates might rise as high as 3.75% this year. Oops. At their May meeting, the Fed raised the rate to 5.25%, blowing away their own predictions, made just 14 months earlier. If the Federal Reserve members themselves were so far off the mark, what chance does anyone else have?
How about the stock market? One would reasonably assume that with interest rates moving so much higher than expected in such a short period of time, stocks would have been a primary casualty. Rising interest rates were supposed to be the death knell for “long duration” expensive tech stocks, which is why they performed so poorly in 2022. But so far this year they have rallied strongly, with investors betting on an Artificial Intelligence renaissance to inflate yet another technology stock bubble. Anyone who might have seen this stock rally coming probably did not think it would be possible in conjunction with the unprecedented and unexpected rise in interest rates.
Yes, the past few years have only served to reinforce the old axiom that “nobody knows anything.” So what does that mean for your portfolio?
First of all, we know that it’s futile to attempt to time the stock market. You might get lucky once or twice, but over time it’s a losing bet. It can be hard to resist the temptation when the front page of the business section is telegraphing how good (or bad) business is going, but as we have seen, so very often the “obvious” opportunities to buy or sell are no such thing.
Second, the one asset class that has proven itself over time is equities. The volatility of stock prices can mask the fact that over time, owning high quality businesses is the most reliable way to grow wealth and protect against inflation. Particularly those that pay healthy and growing dividends, offsetting the impact of inflation.
Finally, in times of stress, a conservative investment strategy should outperform. We saw it last year, when growth stocks were punished by the rise in interest rates. If the stock market or economy were to hit another air pocket, it is likely that market leadership would revert to those higher quality, lower volatility stocks that we prefer to own. Rather than attempt to time the market, sticking with this evergreen strategy allows you to tune out the noise and focus on what matters.
Let’s start the tour in Europe. It was a seemingly foregone conclusion that Russia’s invasion of Ukraine would spell doom for European markets. In fact, France and Germany have been the world’s top performing stock markets, and by a wide margin. This is certainly not an outcome anyone had on their bingo cards last spring!
Next, let’s take a look at interest rates. It seems like ancient history, but as recently as last March the effective US Fed Funds rate was 0.25%. It was at that March 2022 meeting that the Federal Reserve decided to raise rates by a modest quarter point. The Fed also produces a famous “dot plot” chart that displays the predictions of the Fed governors themselves – the very people in charge of setting interest rates. In March of 2022, most of them saw 2023 rates settling in between 2% and 3%, with only a few dissenters predicting rates might rise as high as 3.75% this year. Oops. At their May meeting, the Fed raised the rate to 5.25%, blowing away their own predictions, made just 14 months earlier. If the Federal Reserve members themselves were so far off the mark, what chance does anyone else have?
How about the stock market? One would reasonably assume that with interest rates moving so much higher than expected in such a short period of time, stocks would have been a primary casualty. Rising interest rates were supposed to be the death knell for “long duration” expensive tech stocks, which is why they performed so poorly in 2022. But so far this year they have rallied strongly, with investors betting on an Artificial Intelligence renaissance to inflate yet another technology stock bubble. Anyone who might have seen this stock rally coming probably did not think it would be possible in conjunction with the unprecedented and unexpected rise in interest rates.
Yes, the past few years have only served to reinforce the old axiom that “nobody knows anything.” So what does that mean for your portfolio?
First of all, we know that it’s futile to attempt to time the stock market. You might get lucky once or twice, but over time it’s a losing bet. It can be hard to resist the temptation when the front page of the business section is telegraphing how good (or bad) business is going, but as we have seen, so very often the “obvious” opportunities to buy or sell are no such thing.
Second, the one asset class that has proven itself over time is equities. The volatility of stock prices can mask the fact that over time, owning high quality businesses is the most reliable way to grow wealth and protect against inflation. Particularly those that pay healthy and growing dividends, offsetting the impact of inflation.
Finally, in times of stress, a conservative investment strategy should outperform. We saw it last year, when growth stocks were punished by the rise in interest rates. If the stock market or economy were to hit another air pocket, it is likely that market leadership would revert to those higher quality, lower volatility stocks that we prefer to own. Rather than attempt to time the market, sticking with this evergreen strategy allows you to tune out the noise and focus on what matters.