At the risk of saying “I told you so,” last weeks’ equity market selloff was expected and long overdue. Putting aside the ominous number itself (Dow down 666 points - a devilishly downward denominator), the drop represented almost 2.5% and halved equity market returns for 2018. If the Mainstream Media had their wish, they’d blame it all on Donald Trump - and probably will anyway. But the catalyst was something much larger: rising bond yields (cue foreboding music). This suggests a return of inflation and rising interest rates will have to follow. Higher borrowing costs for corporations will eat into profits, while cash strapped consumers and governments will now have to divert money for consumption to debt-servicing. Bottom line? Less reason for equities to continue their upward march, at least as they have over the past year.
Tempering expectations by revisiting previous equity market downturns has been covered many times in previous Around The World postings. As has the overriding point that building portfolios that include lower risk asset classes is prudent, because government and corporate bonds protect investors from market declines.
Over the past year, bonds have been as popular as President Trump in Democratic circles. But fame is a fickle thing, and the spotlight is back on bonds for investors. We won’t gloat, but by sticking to our knitting, our model portfolios held up well Friday, ensuring our clients hard-earned savings are doing just fine.
More to come on this for sure. Thanks for reading!