3 months through 6/30/22
Large US Stocks
Mid and Small US Stocks
International Developed Market Stocks
Emerging Markets Stocks
So far, 2022 has not been great for investors. There has been no place to hide besides cash. Stocks declined by 20% in the first half of the year and bonds dropped by 10%, with yields rising to over 3%. There were many contributors to the market decline:
- Russia’s invasion of Ukraine
- The Fed tightening interest rates at the fastest pace since the 1980s in response to the highest inflation rates we have seen since that time
- Recession worries after a negative GDP number in the first quarter
- Inadequate supply from the energy sector
But, there was also some good news. Unemployment is at historically low levels. Supply chains are getting a bit better as lockdowns are easing in most places, except China. And recently, energy prices and interest rates have dropped from their peak levels.
Stock markets declining by 20% or more from a high (called a Bear market) are not unusual; historically they occur on average every four years. The beginning of the COVID lockdowns was the last time we experienced a Bear market and the decline was very rapid but the recovery was equally fast. Still, the first half of 2022 was the worst start to the year since 1970.
Bonds declining by this much is very unusual. By way of example, the Bloomberg Aggregate bond index has only has three years of negative returns since 1980, with the largest being a bit over 2% in 2013.
A steep decline in both stocks and bonds has rarely happened in the past. Typically we see a situation where stocks might decline while bonds hold their value or even appreciate a bit and the reverse has often occurred as well. This historical relationship has led to a focus on more balanced portfolios, combining stocks and bonds in an effort to have both growth and stability. That diversification has historically befitted balanced investors, just not so far in 2022.
While the volatility and downward slide has created a little uneasiness, it has also created opportunities.
Bond yields are starting to look attractive to us. We can buy investment grade bonds of solid companies and get yields between 3-4%. Even if interest rates rise, we have locked in that nicely positive return, as long as you hold to maturity. While the rates we are getting from bonds are still below the inflation rate, leading to a negative real return, we do expect inflation will moderate significantly over the coming months.
US stocks in general were expensive at the end of 2021. Right now they appear reasonable. Throughout the first half, we have used the market decline to pick up some great new companies to add to your portfolio.
- Honeywell—the building controls and aerospace supply company
- Home Depot—the home retailing giant
- Starbucks—the coffee chain
- Target—the off-priced retailer
- Deere—the agriculture equipment company (bought just after the quarter end)
These stocks were selling at attractive prices when we purchased them. In almost all cases, the prices have become even more attractive, which may give us an opportunity to add to the positions. They all offer dividend yields over 2.25% (except Deere). We are really excited to have been able to add these quality companies to your portfolio.
We also used the weakness to add to some existing positions, like Paramount (formerly Viacom) and T. Rowe Price. Both stocks are very cheap and offer similar yields of about 3.8%.
Our list of possible stocks to buy is starting to get quite long. We hope to use the market weakness to continue to upgrade your portfolio both in terms of quality and the long term growth potential.
Even in a tough market, we have been able to sell stocks that have bucked the downward trend. So far, in 2022, we have been able to sell Organon, Dominion Energy, Campbell Soup and Kellogg—all with nice gains.
The broader market also looks interesting and we will look at opportunities to add to smaller and overseas companies. Most all of those areas were down in the high teens this year, with US small cap the worst (down over 23%) and emerging markets the best, down just under 18%.
While market sell-offs can be stressful and unnerving, they also can be times to find really good companies or bonds at attractive prices (or yields) to enhance the long term potential of your portfolio. We believe this downturn might be one of those opportunities.
(Disclosure: At the time of this writing, the partners at Harvest own HON, HD, SBUX, TGT, DE, PARA, TROW)