Last week, the Dow (-2.9%), NASDAQ (-2.7%), and S&P 500 (-2.9%) finished in negative territory, and finished the month down about 9% - 10%, the third quarter down about 5% - 7%, and are down YTD about 20% – 30%. Meanwhile, taxable, and tax-free municipal bonds were down over 1%, extending their losses as well. For the month of September and the third quarter, bonds were down about 5%, and are now down about 15% - 20% for the year. That is the one-two punch for portfolios, as the “traditional” 60 / 40 stock / bond portfolio is off to its worst start in 96 years. Yuck!
The same theme continues – inflation and the Fed raising interest rates to combat inflation. The two preferred indicators for the Fed are the Personal Consumption Expenditures (PCE – the Fed’s favorite inflation measure) and the jobs market. Both released data last week that is telling the Fed that it needs to continue to aggressively raise interest rates. Conversely, there were a couple sets of data released last week that show inflation may be starting to ease. The prices of oil, copper, and lumber have all dropped, with copper and lumber down sharply for the year. Plus, real estate prices in the largest 20 cities fell 0.4% in July, the first drop in over 10 years. That trend is likely to continue as 30-year mortgage rates exceeded 7% last week!
OK, so how about a silver lining after all this bad news? In the last 35 years, the 60 / 40 portfolio has dropped more than 4% only two other times (2002 and 2008). In both cases, the 60 / 40 portfolio rallied by over 18% the following year. However, before racing to invest your hard-earned money, I must caution you that we also haven’t seen this level of inflation during either of those two time periods. We probably can expect to experience more pain before things turn around. Please don’t shoot the messenger.
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About the Author: Michael Menninger, CFP®️