Market Update: September 30, 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

 

Volatility continues to grip the market this week. The market moved on to test the lows established back in June and actually made a new low this week. Currently, the market is down about 24% as of the morning of September 30.

In the news this week, Eurozone inflation continues to climb with rising energy prices. The Central Bank of England had to step into a failing Gilt bond market to prevent a complete meltdown of English government bonds. And the Chinese economy continues to slow as global growth comes to a halt.

One common investment theme we’ve seen for the last 15 or so years is “TINA”. Or There is No Alternative, meaning there is no alternative to stocks.

Since the global financial crisis, central banks have held bond yields low, preventing income-seeking investors from finding safer alternatives to the stock market. As a result, in the period following the global financial crisis, the dividend yield on the S&P 500 exceeded the yield for short term government bonds limiting forward returns from the bond portion of a diversified portfolio. This has led many prognosticators to state that the classic 60/40 portfolio made up of 60% equities and 40% bonds is dead. That has since changed with yields on bonds increasing rapidly this year with the S&P 500 dividend yield stuck below 2%.

This has led to the yield on a 60/40 portfolio to rise rapidly in 2022, reaching levels not seen since the financial crisis. The rapidly rising yield for this type of portfolio is not showing signs of slowing down either.

The 60/40 portfolio gained popularity decades ago as a means of diversifying away some of the volatility seen in the stock market while maintaining growth potential from the index. While a pure stock portfolio, shown in gold, typically outperforms the 60/40 portfolio over the long term, the 60/40 does tend to lower downside drops like those seen in 2008, 2020, and in 2022. This is why the portfolio is popular because it provides stable sources of income, lowers volatility, and maintains a reasonable pace of growth. Thus, because of rising bond yields, the 60/40 portfolio is not dead.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved September 30, 2022, from FactSet Database.

2.FactSet Research Systems. (n.d.). S&P 500 dividend yield & 2 Year US Government Benchmark Yield (Interactive Charts). Retrieved September 30, 2022, from FactSet Database.

3.FactSet Research Systems. (n.d.). S&P 500 dividend yield & 10 year US Government Benchmark Yield(Interactive Charts). Retrieved September 30, 2022, from FactSet Database.

4.FactSet Research Systems. (n.d.). S&P 500 SPY and 7-10 Year Treasuries IEF(Interactive Charts). Retrieved September 30, 2022, from FactSet Database.

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