We’ve provided a few charts illustrating quarterly market performance, short-term downturns, and long-term returns from multiple assets classes. The first chart is a wave of red, as nearly every asset class struggled to gain some traction last quarter.

Interest rates went up while inflation was high. In a few very short weeks, the headlines shifted from fast growth and an overheated economy to fears of recession. With interest rates so low and then rising as much as they have so quickly, bond markets did not provide the stability that they have in the past.

The second quarter was challenging as the cornucopia of headline clichés were everywhere: soft landings, hard landings, economic jolts, wrenches getting thrown into the system, unprecedented times, etc. The included charts provide some context on Q2 headlines and equities performance.

Take a deep breath. As difficult as this year has been, there are some things that we can hang our hat on looking forward:

  • Smaller cap stocks outperformed larger cap and value outperformed growth. Cyclical tended to do better than non-cyclical industries.

  • Yields on treasuries have climbed and it finally looks like cash funds may begin to have some yield. Dividend payments have increased.

  • Job growth was strong during the second quarter and continues to be strong heading into the third quarter.

  • Higher interest rates mean that more portfolio income can be generated.

  • Lower equity prices mean that global valuations are better now than they were just a few months ago.

  • Many high-quality companies continue to do well and look poised to do well going forward, even if there is a slowing economy.

Managing Recession Fears

For historical context, per data from Dimensional Fund Advisors1 (DFA), there have been 13 recessions since the mid-1940s. This look-back can provide some perspective should the current economy and markets continue to retract. Markets tend to decline ahead of the “official” start of a recession and begin gaining before the recession ends and the economy improves.

Since 1926, through the end of 2021, DFA counted 28 instances in which the S&P 500 declined more than 20% from a peak to a trough. On average, in the 12 months that followed, the return was 22%. After 3 years, the cumulative return on average was +41%. After 5 years , the cumulative return was +71%.
It has been said, “Music is what happens between the notes.” Portfolio strategy is what occurs between the buys and the sells. It is easy to say, “Buy this one security/fund or sell that one security/fund.” The tough part is coming up with the allocation, understanding the risk parameters and having the discipline to know that some pieces will have more emphasis at any given point than another.

These last few months have been difficult and the next few may be as well. In recent communications, we’ve provided some information about what we are doing from a rebalancing perspective. This rebalancing, along with the tried-and-true concepts of diversification, global allocations, valuation, quality, and generation of income in the construction of your portfolio, are the keys to weathering the current market environment and all its short-term challenges.

1 “Three Crucial Lessons for Weathering the Stock Market’s Form” by Marlena Lee, PhD,  Dimensional Fund Advisors

Modera Wealth Management., LLC (“Modera”) is an SEC-registered investment advisor with places of business in Massachusetts, New York, New Jersey, Pennsylvania, North Carolina, Georgia and Florida. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. SEC registration does not imply any level of skill or training. For information pertaining to our registration status, fees and services, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov) to obtain a copy of our disclosure statement set forth in Form ADV Part 2A. Please read the disclosure statement carefully before you invest or send money.

This commentary is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.

Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.