My Feb. 2, 2022 blog post, titled It’s Always Something!, highlighted the fact that it is always something! No sooner did we begin to emerge from the grasp of the global pandemic then plenty of fiscal stimulus combined with Fed easy money and supply chain disruptions finally caused inflation to begin to accelerate. And then, we watched as global geopolitical turmoil surfaced with Russia invading Ukraine; all while interest rates started to perk up and touch multi-year highs! Consistent with these troubling situations, the markets have been volatile and down pretty much across the board, but still relatively well-behaved; especially when compared to the -35% drawdown that accompanied the beginning of the covid pandemic!
As seen from the table below, large cap U.S. equities (IVV) are only down a bit at -4.57% during Q1, though they we down as much as -12.9% during the quarter. Small- and mid-cap equities (SCHA and SCHM) struggled a bit more, down -7.37% and 5.46%, respectively. Likewise, international developed and emerging market equities (SCHF/SCHE) were down about a relatively well-behaved -6%; surprisingly tame given the turmoil overseas! Bringing up the rear were core bonds (SCHZ, -5.84%), inv. grade corporates (LQD, -8.38%), and high yield bonds (HYG, -4.73%) as victims of higher rates/widening credit spreads due to fears of a weakening economy. So, the traditionally LESS risky bonds underperformed MORE risky core equities.
Strategically, and mathematically(!), underweighting bonds was the right move during Q1, but bonds continued to be a drag on total portfolio performance. A slow rise in rates will hurt bond returns in the near term, but will normalize over time; over a long time horizon, bonds should be less risky than equities and serve as a ballast when equities fall.
As I wrote in my Feb. 2, 2022 blog post, It’s Always Something!,
If you have a long time horizon and can tolerate market volatility, a larger equity content has been shown to reward investors. D&A strives to ensure that client accounts are carefully managed to the appropriate level of equity content and risk suitable for each client.