December 30th, 2022
Seven Things Investors Can be Grateful for This Year
Often we commentators focus on problems facing investors. Instead, I’d like to point out seven things that our clients have to be grateful for this past year.
1) Cash is making a comeback.
It has been a long time since cash accounts paid anything above diddly. In fact, 10 out of the past 14 years, the interest rates on 3-month Treasury bills have been below 0.05%, and much of that time rates were close to zero. Since banks and money market funds re-invest in short term Treasuries, their returns follow the T-Bill rates pretty closely. According to Bankrate.com, the average 1-year CD rate is now above 1%, creating a big “Whew!” for savers.
2) The bottom has not dropped out of the stock market – yet.
Segments of the economy have given us recessionary readings since early this year. One indicator that has successfully forecast every recession for the past 100 years is when short term interest rates exceed long term interest rates. Since long term rates are normally higher than short term rates, this condition is called an “inversion.” We have had that condition flashing a warning signal since the beginning of this summer. However, the stock market, after recording bear market levels of more than 20% losses for index investors, has bounced back twice this year.
But, don’t get too comfortable. In 2008 and 2001, the really deep crashes that marked the stock market bottoming processes did not occur until a year or more after the declines began. A recession may still be coming, and if so, this may be a good opportunity for investors to sell their weaker stock holdings before recessionary forces drive the stock markets down again.
3) Our bond warnings over the past few years have saved a lot.
For several years we have advised our investors to lighten up on bond holdings. As you may know, bond prices go up as interest rates go down, and vice versa. Since interest rates were at zero, about as low as they can go, that meant that bond prices were about as high as they can go. Since we believe in selling high so we can be buying low, we had been warning clients that this call was a no-brainer.
Sure enough, 2022 has been the worst year in history for bond holders, so our warnings and actions in our bond holdings have saved our clients a lot of money.
4) There is still time to move out of bonds.
Interest rates have dipped a bit over the past month or two, lifting bond prices. History suggests that the headwinds of rising interest rates facing bond holders in 2022 could continue for many years. For investors who hold bonds, any rally in bond prices, like we have seen recently, might signal a good time to pare back existing bond holdings.
5) Inverse funds.
Inverse funds are designed to move opposite to an indexed grouping of stocks or bonds, such as the S&P 500 Index. They are often called “short funds” because inverse funds go up as an index goes down. Shadowridge has effectively used them this year during market declines to cushion portfolio values without having to liquidate longer term holdings. By continuing to hold the strongest segments of the market and shorting the weakest, we have been doing well compared to the indexes this year.
6) Inflation may have finally peaked.
That is the good news. But, according to Rob Arnott of Research Affiliates, LLC the bad news is that once inflation hits 8%, as it did last summer, it is very difficult to get it back under control. His research shows that the average time it takes for inflation to revert from over 8% back down to stay below 3% is ten years, with the shortest time being six years. It looks line inflation will be with us for a while.
7) Your team at Shadowridge – your designated worriers!
If you have Shadowridge managing your money, we are dealing with these issues so you don’t have to worry about them. If you are one of our readers who is not yet a Shadowridge client, I would suggest that this is a good time for you to call to have a free portfolio review to see how our proactive style of investment management could help you. And, please call now before the stock market declines continue. Afterward, is too late. That phone number is 888-434-1427.
Have fun in the New Year!
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Shadowridge Asset Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
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