As we mentioned in our 1st quarter client letter, market volatility (like the past few days) is inevitable for the long-term steward of wealth. The S & P 500 is now (as of yesterday’s close) down over 8% since its July 16th peak. The tech laden Nasdaq 100 is down over 12%, firmly in correction territory.
We invest in equities and other higher risk assets to better fund future priorities, recognizing that higher returns typically come from long-term risk-taking. Periodic market corrections, where stocks pull back from speculative highs, are a natural and healthy aspect of equity investing.
So while expected, market volatility isn’t comfortable. Headlines abounded across the financial and broad media yesterday of “Global Markets Turmoil…” and “Japanese stocks crash in biggest one-day drop since 1987…” (Always remember these are designed for clicks, not perspective.) The market selloff was sparked by Friday’s jobs report, which shifted the economic outlook from a soft to a hard landing. Credit card delinquencies are also rising, a sign that COVID-era savings have been drawn down. Throw in fear of a popping AI bubble and a Bank of Japan rate hike that sent Japanese shares tumbling.
Our All Seasons investment approach is designed to weather periods of short-term stress and tune out the noise of such sensational headlines. The Protective Reserve ensures that, regardless of market conditions, your household has a liquid safety net. Growth Assets for future priorities are allocated to a broad range of asset categories designed to perform well across various market environments.
Indeed, since the S & P 500 peaked in mid-July, we’re pleased to witness positive returns from several of the categories we expect to provide liquidity and downside protection. [i] Long treasury bonds are up over 5%. Inflation Protected Bonds and Municipal Bonds are also up slightly. Meanwhile, Opportunistic Credit is also positive since the equity peak. This is encouraging as credit losses are typically a warning sign of substantial economic weakness. Meanwhile, Short-Term Bonds and Treasury Bills – the bulwarks of a Protective Reserve – have preserved principal while equities have fallen.
This, of course, is a very narrow time period. We shouldn’t extrapolate that this is how every correction will look (or even this one if market declines continue.) Nonetheless, it does show the power of diversification.
Given the dispersion in returns, we continue to monitor asset allocations versus targets, seeking rebalancing opportunities when appropriate. We are also looking at tax-loss harvesting opportunities within equities and across asset classes most impacted by the recent sell-off.
Feel free to contact us if you’d like to discuss in greater detail. Markets fluctuate, priorities change. We’re here to help.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
[i] Source: yCharts. Asset returns are represented by the following funds (category): Invesco QQQ Trust (NASDAQ), iShares Core S&P 500 ETF (US Large Cap), Schwab Fundamental U.S. Large Company ETF (US Fundamental), iShares National Muni Bond ETF (Municipal Bonds), DFA Municipal Real Return Institutional (Inflation Protected Bonds), DFA One-Year Fixed-Income I (Short-Term Bonds), SPDR Blmbg 1-3 Mth T-Bill ETF (Treasury Bills), Vanguard Long-Term Treasury ETF (Long Treasuries), and PIMCO Flexible Credit Income Inst (Opportunistic Credit). Clients of Flatrock may maintain positions in these securities. Flatrock renders investment advice and recommends securities on a personalized basis, only after gaining a full understanding of a client’s unique situation. Past performance is no guarantee of future investment results.