Market Update - September 2022
In late August Jerome Powell, Chairman of the Federal Reserve, more or less said he is willing to tank the economy to get inflation under control. These words were a stark contrast to the soft language he’s been using over the past year and the US stock market responded by dropping 11% over the following weeks and is down 22% year-to-date.
This is understandably a stressful time to be an investor and so I want to outline a few actions we are taking with respect to our client’s portfolios.
Actions we are taking
Reducing our exposure to international small and value stocks - We are lowering our exposure towards the small and value sectors of the international stock asset class. As we enter a period of economic contraction we aim to lower our risk without reducing our international stock allocation.
Reducing our exposure to inflation protected US government bonds - Two years ago we added inflation protected bonds to our portfolios to hedge against unexpected inflation. Now that inflation has arrived we are reducing that exposure slightly and redeploying those funds to other short, high-quality bond investments. Inflation protected bonds do a great job at protecting against unexpected inflation but can be more volatile than other US government bonds.
Maintaining high quality and short bonds - We only invest in high-quality government and corporate bonds that have a lower chance of default compared to more speculative junk bonds. In addition, our bond investments are very short in nature, meaning we don’t lend out very far into the future. By keeping our bond investments high quality and short we dampen the volatility and add ballast to the portfolio.
Maintaining global diversification with a bias towards US stocks - We limit our exposure to any one country by investing across the entire globe. That said, we maintain a ‘home bias’ towards US stocks, allocating approximately 2/3 of our stock exposure to US companies and the remaining 1/3 outside the US.
Maintaining our dividend and capital gain distribution strategy - When your investments pay dividends or distribute capital gains we use that cash to actively rebalance your portfolio back to target, thereby buying more shares at lower prices.
We are proactively working to limit downside exposure while trying to protect your investments from inflation. Although this time may feel unique, bear markets and recessions are common for investing. The stock market has always returned and eventually exceeded previous highs. Of course, there is no guarantee, but we are optimistic for the future and know that businesses and employees are working hard to succeed within the companies we are investing in.
We will keep you updated as we make adjustments to your portfolios.
Thank you for your continued trust and business,
Andy