November 2022 Monthly Review
"We Can Work It Out"
By Loyd Johnson, Chief Investment Officer
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A Look Back
The Beatles released the above title in 1965 as a double A-side single with Day Tripper. It marked the first time in Britain that both tracks on an artist’s single were promoted as joint A-sides. It reached #1 on the charts in the UK and the US. It was also a great example of the John Lennon-Paul McCartney songwriting collaboration seen in the 1960’s. As we close in on the end of another calendar year…one filled with higher interest rates, inflation, market volatility and overall investor angst…it is a title that is timely and one worth remembering as we navigate these unsure times and markets. As we meet with clients and review financial plans and account performance, we are often asked, will things get better? And, the short answer is Yes, we will work it all out. Now, the much more difficult answer is when?...and how? More on that below. November saw a continuation of the positive turnaround in October in most major asset classes. The S&P 500 was up over 5.5% and had erased nearly half of the intra-year low (-25%) in the index. International stocks fared even better, and are now on par with domestic returns for the year. Core bonds recorded the best month of the year with a +3.68% return, and are now down only 12.62% for the year. Commodities took a breather, as inflation levels trended a bit lower. The CPI report in October showed inflation increased .4% on a monthly basis and 7.7% for the last year. That is down from the 9.2% number we saw earlier this year, but still much higher than the 2-2.5% the Fed desires. Cash continued to be one of the best-performing asset classes…and we forget sometimes that Cash is a true asset class, and offers some real diversity when others are uniformly negative. This is especially true now that we have left the near-zero rate environment of the last several years.
A Look Ahead
We mentioned the acronym TINA (There is No Alternative) in prior writings as one of the catalysts for higher stock prices from 2020 through the beginning of this year. Investors especially dislike getting 0% on their money. It led to people taking on more risk and investing more and more into dividend-paying stocks…and stocks in general. Now, there are alternatives. One year US Treasuries are currently yielding over 4.7%, the highest levels since 2007—right before the beginnings of the Great Recession. That represents a reasonable option versus owning stocks. Indeed, as the Fed continues its historical increase in the Fed Funds rate, the yield curve has shifted dramatically. It is no longer a traditional, upward-sloping line where longer maturities demand higher yield. Rather, it is funky, and bent at certain levels and portends potential trouble ahead. As shown to the right, the two-year Treasury is the high point currently…then yields shift down out to 10 years, then back up at 20 and finally down again at 30 years. The Fed controls what happens at the short end of the curve through the Fiscal Policy and the Fed Funds rate. The longer end of the curve is more a product of supply/demand. An inverted yield curve, where the two-year yields more than the 10 year, has predicted the last seven recessions. It seems to us that the recent rally in stocks, while perfect in timing for the holiday season, will need additional positive factors to push it higher in the coming months. We continue to take advantage of market moves…both good and bad…knowing that the Beatles had it right. We can/will work it out...