Speaking during a recent ThinkAdvisor webinar on the topic of "Recession Proofing Your Clients' Portfolios," Rob Brown, chief investment officer at Integrated Financial Partners, offered a stark analysis of the situation facing investors heading into late 2022.
To begin with, inflation rates are the highest since the early 1980s, and most economists expect the economy to fall into a recession by 2024. Stocks are officially in a bear market, with the benchmark Standard & Poor's 500 Index declining more than 20% from its peak in early January. Bonds, too, are in a bear market, which Brown sees as perhaps even more troubling than what has happened with equities.
"Stock bear markets tend to be more severe on a percentage loss basis than bond bear markets, but stock bear markets tend to play out much faster and recover more quickly," Brown said. "This makes sense because stocks are far more attuned to the basic facts about whether an economy is seen as growing or shrinking."
The picture with bonds is much more complex, Brown warned, noting that bonds are generically a lower-return asset category in the long term. A blended portfolio of quality bonds returns something in the ballpark of 1.6% above inflation from a long-term historical perspective, he said. That's not much to work with when it comes to the downside.
The ThinkAdvisor webinar also featured David Blanchett, managing director and head of retirement research, PGIM DC Solutions; Mike Kurz, director of programs, Investments & Wealth Institute; and Marcia Mantell, owner of Mantell Retirement Consulting. According to the panelists, there is strong evidence to believe that interest rates will continue to climb in the near- and mid-term futures and that both stock and bond portfolio values may continue to decline.
Opportunities Abound
One silver lining, according to the group, is that income investors now have more attractive opportunities to secure higher yields. It is a great time to begin building bond ladders and to think about ways to take advantage of the rate environment, perhaps by considering CDs or annuity types that benefit from higher rates. And, there are attractive opportunities to purchase Series I Savings Bonds, which pay a 6.89% interest rate through April 2023.
"This is just an extraordinary moment," Brown said. "Essentially, every single asset category on the planet is down. While it is an extremely rare outcome, it is not an irrational or unexpected outcome given what are we facing economically in the U.S. and around the world."
As the group pointed out, thanks to the soaring inflation, essentially all of the central banks around the world are simultaneously tightening their monetary policies. During the course of 2021, many investment professionals expected that higher inflation would be transitory and would disappear.
It's All About Timing
However, with the passage of time, advisors and their clients have had to adjust to the reality that the current wave of higher inflation is not transitory. The global markets are doing the same, and investors are feeling the pinch.
As the panel discussed, those people who are still working and closing in on retirement seem to be the ones facing the most crucial decisions. Younger people have time on their side for financial markets and the economy to improve, while those who have been retired for a while have probably already made many of their big decisions. Those in the middle remain in a precarious position.
