by Dave Young, President
Fall is one of my favorite times of the year. The temperatures move down to comfortable from the high temperatures of summer. Football season is in full swing, the leaves in the mountains are spectacular, and hunting season is here. That is the good news!
The less desirable part of Fall is that it is historically the weakest time of the year for stocks, bonds, and real estate. There are many theories about why this happens, but no one knows. I’ve been investing long enough that while it doesn’t always play out this way, Fall markets do decline more often than they don’t, which always complicates our life at Paragon.
Since the last newsletter, stocks moved up in July, back down in August, then sold off into September. Global stock markets had their worst month since last September. For the quarter, the Dow held up the best, down -2.1%, while the S&P 500 dropped -3.3%, and the NASDAQ declined -3.9%.
Most stocks pulled back in September, but the broad market indexes are still above average for 2023. Year-to-date, the S&P 500 is up 13.1%, and the NASDAQ is up 27.1%
Real estate-related investments have sold off since May in a direct correlation to mortgage interest rates going up. Mortgage interest rates are at their highest level in 23 years.
Longer-term bonds have suffered staggering losses. After waiting years for rates to move up, that wait is over. Theoretically, bonds are on the conservative side of the ledger (and I emphasize theoretically). According to Bloomberg, long-term bonds, i.e., durations of ten years or more, have plummeted -46% since March of 2020. Thirty-year treasury bonds have plunged -53% during that same time.
These bond losses are comparable to when the stock market dropped -49% in 2000-2002 when the dot-com bubble burst. They are right there with the losses we saw in the 2008 financial collapse when stocks lost -57%. In short, the current bond market sell-off is comparable to some of the worst market sell-offs in stock market history. You are not a happy camper if you hold long-term bonds as part of a traditional balanced portfolio, as many investors do.
In the post-pandemic era, the central bank’s aggressive turn toward monetary tightening has caused this bond-market rout. Their excessive Treasury issuance has added even more fuel to the fire.
The highest inflation in 40 years forced the FED to raise rates. That was caused by the folks we elect to run our country. Long-duration yields moved to their highest yields since 2007, with the 30-year treasuries passing the 5% barrier for the first time in decades. The 10-year bonds followed a similar path, at just over 4.7%.
The bottom line is that as your investment advisors, we invest in Stocks, Bonds, and Real Estate. We have made money in Stocks and Real Estate this year, but most importantly, we have successfully avoided the devastating losses inflicted on the bond market. We are happy to be able to report that to our investors!
Managed Income has had the most challenging year thus far because it invests in conservative investments, which include all types of bonds. It is breaking even for the year, which is a big win in light of the devastation in the bond market.
Top Flight is performing well this year. It is up 15.5% year to date versus 13.1% for the S&P 500. Its underlying portfolios are performing as follows: For the year, Fast Movers is up 14.2%, Fundamental 20 is up 22.8%, and Liquidity Factor is up 10.8%. Long-term, from January 1998 through September 2023, Top Flight is up 1355% versus 612% for the S&P 500. Please see the complete performance disclosures on page 7.
The number one question I get asked is, “What’s next?” I can tell you the factors in play, but I can’t see into the future. I wish I could. It would simplify everything for all involved.
From my perspective, it feels like we are sitting on the edge of a recession that should have happened nine months ago. We have an inverted yield curve of the 10-year versus the three-month Treasury yield. While there are no guarantees, this pattern has preceded economic downturns over the past four decades.
In previous years, real estate prices went through the roof because interest rates were so low. Now, those rates have increased due to the inflationary pressures and that should put downward pressure on real estate prices.
Real estate prices have dropped ten to fifteen percent, which isn’t enough to make a difference. It will take some economic shock for real estate prices to adjust to lower levels that make sense based on where interest rates are currently. Historically, that would be a recession. That would not be good for stocks or bonds.
Why haven’t we had a recession yet? It is because of the trillions of dollars our government has pumped into the economy. That keeps the economy from tipping over, but it also creates the most enormous levels of debt we have ever seen. It also creates the highest inflation we have seen in 40 years. It keeps things plugging along but at a significant long-term cost.
Up to this point, we have taken a very conservative approach on the bond side, which has protected us from the devastation in the bond market. At the same time, we have been able to capitalize on the stock market and deliver returns better than the S&P 500 in our equity accounts.
The Fed is walking a tightrope. It has kept its harsh anti-inflation rhetoric and hopes to lower the inflation rate without tipping the economy into a recession.
We will continue to follow our models and take what the markets give us. It boils down to economic performance and inflation. The inflation rate has slowed, but inflation remains roughly double the Fed’s 2% annual target.
What should you do as an investor? Focus on what you can control. You cannot control returns, but you can control your investment strategy and plan. Reach out to us if you want to discuss or revisit your long-term strategy.
Successful long-term investors recognize that a disciplined approach is the shortest path to achieving financial objectives.
Hunting For True Wealth
On another subject, I’ve just completed a book. I’m not lacking things to do, but I felt that I had some important things I wanted to share, and if I didn’t start soon, it may never happen. So, I added it to my list of things to do and am close to publishing it.
I love to hunt and have over 1000 nights in the outdoors over the last 50+ years. My book incorporates some extreme hunting adventures that I think you would find very interesting. I tie in and teach the principles we follow at Paragon regarding building financial wealth. More importantly, after 37 years of managing money and helping clients earn financial wealth, I go in-depth about what I believe to be even more critical: True Wealth. We will keep you informed as this book is released if you want to get a copy.
As always, it’s a privilege and a humbling experience to know that you have chosen us as your financial advisor. If you have any inquiries or wish to discuss any concerns, please don’t hesitate to contact me or any team member. Thank you for the trust you have placed in us.