The equity (aka stock) market indexes, the S&P 500, the Dow Jones Industrial Average, and the NASDAQ get all of the headlines in the daily news. Most investors are surprised to learn that in the United States alone, at approximately $25 trillion, the equity markets are dwarfed by the bond markets’ $46 trillion size. Equally important, just as the equity markets surge and wane with investor sentiment and the economic environment, the bond markets are affected by, and react to, all of the same drivers, sometimes in the same manner and degree, and often in a completely different manner. This is the premise behind diversification in portfolios.
So, we all see the cyclicality of the stock market with 50+ percent of the population owning equities in one form or another, and the daily broadcast of the equity markets’ behavior in the media. Meanwhile, the bond markets’ daily behavior receives almost no media attention, and is often opaque to investors until they review their holdings on their monthly statements.
As we have discussed before, we are that unfortunate generation that has experienced in our investment lives the 2000 Tech Wreck, the 2008 Great Recession, the COVID crash, and now one of the rare periods where both stocks and bonds are experiencing negative returns. But, having said that, there is still a strong argument for an allocation to bonds today as rising rates have tended to be bad for almost all asset classes, and bonds tend to perform relatively well on a comparative basis. Bonds got off to one of the worst years ever, but have fared better than the equity markets, and just as equity markets ebb and flow, unless history never repeats itself, at some point the Fed will lower interest rates to reinvigorate the economy, and as rates go down, bond prices will go up. This is no guaranty, but only 10% of the years since 1926 have had negative bond returns*.
The point is not to say bonds will outperform equities, but for clients that have exposure to bonds as part of their asset allocation based upon their goals, age, risk tolerance and risk capacity, do not let recent history lock you into the mindset that what you have experienced is forever the future, but as with all markets, patience and market cycles are your friend. If we experience a recession, which many economists project will happen, the cure typically has been the Fed lowering interest rates, which have historically been favorable to both the equity and the bond markets. We believe in diversification, but must remind our dear readers that even diversified portfolios suffer when a number of asset classes come under duress at the same time, but it is our expectation with history as our guide, this event will be infrequent, and short lived.
As always, we are grateful for your business and friendship.
Drew & Dave
*Source: Vanguard - There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.