By Ryan O’Donnell, CFP® and Mike O’Donnell, CFP®
“When you come out of the storm, you won’t be the same person who walked in. That’s what this storm’s all about.” ― Haruki Murakami, Kafka on the Shore
Despite the scary headlines about bank failures, a looming recession, China tensions, natural disasters and stubbornly high inflation and interest rates, it was a great quarter for stocks. U.S. equities were up over 7% for the quarter ended March 31st and international stocks were up over 8%. We also saw an increase in bond prices during Q1, which we haven't seen in quite some time. In fact, U.S. bonds rose in value (not just yield) by almost 3% during the most recent quarter.
Despite those positive trends, three regional U.S. banks failed, including Silicon Valley Bank, which was the second largest bank failure in our nation’s history. And then European giant, Credit Suisse was on the verge of going under, before agreeing to be bought out by rival UBS. With instability in our banking system top of mind for the first time since the global financial crisis, many of you have been wondering how safe your deposits are at your bank. Most experts believe these banking failures were isolated incidents driven by gross mismanagement of duration risk and having too high a concentration of depositors from the same industry. They don’t think the failures will cause a contagion like we saw in 2008-2009.
Rest assured, the U.S. government insures up to $250,000 in deposits per account holder in checking, savings, and money market accounts through the FDIC. Not one of our client’s has any uninsured cash deposits with our firm. We keep excess cash invested in either money market funds or US treasuries. If you do have more than $250,000 sitting in cash at your bank, you may want to think about redeploying those funds into higher yielding, but still very safe, U.S. Treasuries. One silver lining to the Fed’s rate hiking campaign is that we’re seeing attractive yields in fixed income for the first time in 18 years. For instance, U.S. Treasury Based money market funds are yielding almost 4.5% right now with daily liquidity, and three U.S.-backed bonds are yielding around 4.7%, which is a great alternative to what banks are paying. In fact, we've been working with a lot of companies on their cash management strategies to help them better manage risk and increase their yield on short-term securities.
With higher yield on short-term fixed income and uncertainty about the stock market, interest rates and the economy, there’s clearly a lot of “dry powder” on the sidelines waiting to be deployed. That tends to be a good set up for stocks. In January, money market assets hit a historic peak. When that much cash builds up, as the chart below shows, it tends to be a precursor to double-digit stock market returns over the next three years.
That doesn't mean there wasn't some serious turmoil in the last quarter that continues weighing on peoples’ minds. In addition to the aforementioned bank failures…
The odds of a U.S. recession in 2023 hit 65% according to Bloomberg’s latest monthly survey.
The U.S. shot down a Chinese spy balloon off the coast of South Carolina.
The dollar continues to depreciate, helping to boost returns of our international holdings.
Artificial intelligence is disrupting industries and careers at an unprecedented level.
As we remind our clients during times like these: Uncertainty is unavoidable; market timing is futile; and diversification is still an incredibly powerful tool for reducing the many risks you face as an investor.
When the headlines worry you, bank on sound investment principles
Rather than rummaging through your portfolio looking for trouble when headlines make you anxious, turn instead to your investment plan. Rest assured your plan is designed with your long-term goals in mind and is based on principles that you can stick with, given your personal risk tolerances. While every investor’s plan is a bit different, ignoring headlines and adhering to time-tested principles may help you avoid making shortsighted missteps. The last thing you want to do is allow the news media or your close friends to convince you to stray from your plan. You never want to try getting in (or out) of the market at just the right time to avoid short-term pain. Study after study shows that timing strategies almost never work. Mis-timing your bets by even a few days can cause irreparable loss of capital over the long term.
Data from Morningstar and Ned Davis Research shows that 78% of the stock market’s best days occur during a bear market or during the first two months of a bull market. If you missed the market’s 10 best days over the past 30 years, your returns would have been cut in half. And missing the best 30 single days would have reduced your returns by an astonishing 83%! And last time I checked; the market is not going to text with instructions to get back in, because it’s planning to have a big day.
Conclusion
As OG clients know, a well-constructed financial plan assumes market corrections and outsize volatility will occur from time to time. Sticking to your plan will position you well to handle any threats that come our way. Despite a severe correction in equity markets in 2022, and a daily barrage of alarming headlines in early 2023, U.S. stocks are still generating average annual return of 10.45% over the past five years and 11.73% annually over the past 10 years – far outpacing any other asset class.
As Nobel laureate Merton Miller used to say, “Diversification is your buddy.”
We hope you’re staying safe and healthy. Again. If you have a question or just want to review your performance, please contact us HERE to schedule a quick meeting with either Mike or Ryan.
