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Income Is Back in Fixed Income and Light at the end of the Tunnel

October 11, 2022
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The third quarter was another volatile ride for investors. After getting off to a strong start, U.S. stocks faltered. A hotter-than-expected August Consumer Price Index (CPI) reading dashed hopes for a slowdown or pause from the Federal Reserve in raising short term interest rates.  Their primary focus right now is to bring down inflation.  When the August CPI came in stronger than expected, it signaled to the market that the Federal Reserve will need to go higher with their increases to short-term interest rates and continue the process longer than the market hoped. 
 
The Stock Trader’s Almanac says, “September is when leaves and stocks tend to fall, on Wall Street, it’s the worst month of all.” That adage certainly proved true this year as the S&P finished the month down more than 9%, its worst monthly return since March 2020 and its worst September since 2002. The S&P finished the quarter down around 5%, falling below its June low. Through the first three quarters of the year, the S&P shed almost 25%, putting it on pace for its worst year since 2008.
 
The third quarter was just as difficult for bond investors. The same factors that hampered stocks – high inflation and a hawkish Federal Reserve – helped push interest rates higher. The 10-year US Treasury yield soared past its June high, reaching nearly 4%, its highest level since 2010. The Bloomberg Barclays US Aggregate Bond Index was down nearly 5% for the quarter, bringing its year-to-date loss to nearly 15%.

The strong US dollar also continued to weigh on international stocks as the indices in developed and emerging global markets were each down double digits.

 As we head into the final stretch of the year, we continue to monitor closely any shifts in the market landscape. The good news is, there are some bright spots.

Income is Back in Fixed Income

For years, the zero-interest rate posture by the Fed did not provide a good return to bond investors.  But that is changing.  As inflation moderates and the Federal Reserve raises short-term interest rates, investors are now able to lock in attractive levels of income. 

Brighter days ahead

While 2022 has been a difficult year.  Much of the damage is behind us.  From October through the end of the year, we are entering a seasonally and cyclically strong period for equity markets.  We do expect some volatility around the first week in November which will mark the next meeting of the Federal Reserve Board (November 1-2) and the mid-term election (November 8).  While periods like 2002, 2008, and 2022 are not easy, they clear the air and provide good opportunities for investors. 

Some statistics that say the law of averages are on our side

After stocks drop more than 20%

  • The average return over the next three years = 41%
  • The average return over the next five years = 71%

Dimensional Fund advisors 10/01/2022

Stocks have risen by 2.5% two days in a row (10/3 & 10/4) only 14 times in history

  • Six months later the market has been higher 12 of 14 times

Charles Schwab/ Bloomberg 10/04/2022

Year-End Tax Planning

  •  Realized Taxable Gains – If you sold a house or business, do you need losses? Have you realized gains or losses in other taxable accounts?
  •  Charitable giving – Would you like to discuss the most tax efficient ways of giving money to your favorite charities?
  •  Did you max out (if eligible) contributions to IRA’s, 401k, SEP?
  •  ROTH conversion – If you are under 60 yrs and are in a lower tax bracket, you may consider converting IRA dollars to a ROTH Ira.

We are reviewing all taxable accounts and looking at our options for harvesting tax losses. Please reach out to us with any questions or to discuss the tax planning issues above.