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Sound Advice: January 26, 2022

Market Perspective

Turbulence on Wall Street is a periodic occurrence that regularly punctuates the ongoing upward path of progress.  More often than not, there is a retreat of 10% to 15% during the year and less frequently, price pullbacks are even more pronounced.  Recent examples of the latter took place during the closing quarter of 2018 as well as the opening months of 2020.  In both cases (as always happens), the rebounds that followed carried stock prices to even higher levels.

The current slippage will follow the same pattern.

For an extended period, we’ve pointed out the frothiness of market valuations, but stretched valuations alone do not ignite downturns in prices.  Indeed, excesses tend to last far longer than might appear justified.  What triggers pullbacks are events that threaten to impede economic progress.  Rising interest rates, international tensions, significant negative business developments, and yes, the current pandemic, are key examples of what may temporarily impede forward motion.

Typically, market price pullbacks are indiscriminate.  Invariably, they provide the possibility of adding holdings that have become available at more attractive levels.  Over time, these periods have always signaled increased opportunity.

Although temporarily lower stock prices mean better value is available, the opportunities in bonds are no longer the viable and worthwhile option that they had been for the past four decades.  Back in the early 1980s, interest rates (and inflation) were at historic highs.  As interest rates worked their way down from the peaks of that time toward zero, bonds were the place to go, especially during times when stock prices were heading south.

That opportunity is long past.

When interest rates are easing, bond prices rise.  But from recent levels and with inflation running well above the optimal long-term pace, it is likely that the Federal Reserve Bank will take a series of actions to bring inflation down.  Interest rates will rise and Quantitative Easing (a fancy term for describing the Fed’s program of bond buying, which stimulates the economy) will taper off.  For these reasons, bonds, especially those with longer maturities, will lose value, even after taking ongoing interest payments into account.

Bonds held now should be limited to those of short maturity and serve primarily as shock absorbers, not as a source of potential appreciation or significant current income.  As rates rise and the central bank’s efforts to tame inflation make progress, it’s likely that bonds may again be appropriate holdings, but that’s not currently the case.

Well-selected stocks, funds, and low-volatility alternative investments appear to be the best situated at the current market juncture. 

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

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