“Success is not final, failure is not fatal; it is the courage to continue that counts.” — Winston Churchill
After a hard month for investors in February the stock market indices we follow were mixed. The large cap US indexes and the overseas indices posted solid gains while small and mid-cap stock indexes struggled. Commodities continued to lag, ending the first quarter with a negative return, as did the US Dollar index. The Aggregate Bond Index bounced back with a strong monthly return.
All data as of 03/31/2023, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
What a ride the first quarter of 2023 has been for investors.
The good news is that after negative returns in 2022, all the equity and bond indexes we follow ended the quarter with positive returns. Those returns, however, were not a feel-good, slow market drift higher. Instead, the move higher has been more volatile and jagged.
For example, the S&P500 (Chart #1) started the year off with a nice rally in January, peaked in February, retreated back below the 3900 level in early March before rallying into the end of the month.
At the same time, we don’t know what to make of the small-cap S&P600 chart (Chart #2) that, in our opinion, looks scattered and unsure with no real trend. The only thing we view as positive is that the trend hasn’t been negative. The 1140 to 1180 range has the appearance of a comfort zone for the index, similar to the 3900-4000 level on the S&P500.
At the same time, bond yields have been on a roller coaster ride. The 2-year US Treasury Bond Yield (Chart #3) moved up more than 1% from the start of February until its peak in early-March, only to drop below 3.8% during the month.
None of this comes as a big surprise to us.
In our 2023 Outlook we put forth the thought that you want to be focused on the next decade, not the next quarter.
With volatility comes opportunity. Yet, in our experience, investors do not like volatility.
We do believe that the patient investor will be rewarded with positive gains, but those gains will come with volatility.
We enter April with a positive near-term outlook for the stock market for a number of reasons. First, according to the Stock Trader’s Almanac 2023, in pre-election years, April has historically been the best month for the Dow Jones Industrial Average (DJIA) and second best for the S&P500 (SPX) with average returns of 3.9% and 3.5% respectively from 1980 through 2022.
The other reason for our positive outlook is that the market has digested the banking turmoil associated with the collapse of both Silicon Valley Bank and Signature Bank. Federal authorities were quick to react to the largest bank to fail since the financial crisis of 2008. We feel the market reaction proved the resilience for the market indexes, even as specific sectors may have suffered as a result of the disorder.
Beyond April we just aren’t sure what to expect. The well-known adage of “sell in May and go away” – the idea that the worst 6 months of market performance are between May and October –has held up over time. “From 1990 to 2022, the S&P 500 has returned about 2% from May through October, while November through April has averaged about 7%.”
That doesn’t mean any given year works out that way, nor are we advocating a market timing strategy.
Instead, we encourage caution and looking at what is happening with the markets in real-time.
What About My Asset Allocation?
How you distribute your investments between different asset classes plays a big part in how you do over the long-term. Historically, if you hold mostly stock funds you will have more volatility but higher returns over time. Increase the levels of bonds and “alternative” asset classes and your returns will be lower but volatility will be lower.
There is no one correct answer to what your asset allocation should be. That is defined by two factors – where you are in life and your risk tolerance, not the short-term market outlook. We work with some 30-something year olds who are more risk averse than a number of our 80-year old clients. Balance the asset classes properly for your situation and you have an appropriate risk-reward balance.
One big misnomer about asset allocation, in our opinion, is the idea that the allocation is fixed, not fluid. Take 60/40 stocks to bonds, for example. At Magellan that can be, at times, 64/36 or 55/45.
This can happen for a number of reasons. At times the allocation will move over the course of time due to market performance increasing one side of the portfolio. For example, in a hypothetical year in which the S&P500 is up 30% and the Bloomsburg Aggregate Bond Index is up 2%, a 60/40 stocks to bonds allocation that isn’t rebalanced will more than likely end the year with the stock side of the portfolio overweighted relative to the starting point.
The other reason a 60/40 allocation might not be exactly 60/40 is because of a tactical shift in how the assets are invested based on one’s outlook market trends and/or economic conditions. If, for example, you thought the stock market was trading at high valuations and the economy wasn’t going to be great in the coming year you might make the decision to lower the stock exposure to 55% and increase the bonds to 45% – tactically shifting but not attempting to time the market.
Last year was a year of resetting the markets. We see 2023 as a stepping stone to the future for the stock and the bond markets. Years where there is little volatility and steady returns are fun times for investors. That is not what you should expect this year.
We would describe it as fits and start. There will be times you will feel pretty good, others unsure.
The economic numbers likely will be lumpy, not linear. We see a likely scenario where one month the inflation report will be down, the next higher. Same with economic growth.
This year will be a year in which you need to put your head down and continue to move forward with your investment plan. Markets are not linear but work in cycles.
This is the year to remember that as an asset class, equity has historically produced better long-term returns than other asset classes.
We truly believe it would be a mistake to hide in cash until it “feels better” to be invested. That’s market timing, not investing.
Think of 2023 as a stepping stone and not a stumbling block. Take what the markets are giving you as an opportunity to upgrade your investment portfolio to one built for the future, not the past.
For More Information About our Complimentary Portfolio Review Service, Contact Our Team Of Financial Advisors Today!
1 Seeking Alpha, Sell in May and Go Away, Kent Thune, May 5, 2022
2 The Measure of a Plan, Investment Returns by Asset Class, January 8, 2023
3 The Measure of a Plan, Investment Returns by Asset Class, January 8, 2023
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Any other referenced entity is a separate entity from WFAFN.