The Rally Continues
With August coming to an end, the US and international stock markets continued to grind upward with relatively low volatility. There are certainly reasons for optimism, including continued low interest rates, strong employment trends, a healthy US consumer, and strong corporate earnings growth. Thus far, investors have focused on positive trends and the concerns of the market such as COVID, inflation, taxes, the Federal Reserve’s interest rate policy, or “peak growth” have been discussed but have had little impact on market strength.
The S&P 500 ended August with seven straight months of gains. This is the longest streak since a 10-month streak starting in 2017 ended in January 2018, and seven-month streaks of positive performance have only happened 15 times since 1945. Further, the S&P 500 has not experienced a correction of 5% or more since October of 2020, while the market historically averages three 5% or greater pullbacks every year. While recent positive trends are consistent with a stronger economy and healthy business fundamentals, the persistent movement upward with little resistance is more the exception than the rule.
The bond market has been on a different path, as it has remained relatively flat since July 2020. Interest rates are higher than this point last year, which has been a headwind to bond price performance. Assets with credit risk— like corporate investment grade and high yield bonds – have fared slightly better as economic data has improved, but overall bond performance has been lackluster. The US 10-year Treasury rate rose slightly in August, ending the month at 1.30%. It remains our opinion that current interest rates are not indicative of the current or near-term future of both the economy and inflation. Therefore, we expect rates to be higher at year-end and are still somewhat cautious on bond trends as a result.
With the strong rally in stocks combined with a relatively flat bond market, portfolios could be skewed toward higher-risk assets and out of alignment with long-term risk tolerance. In times like these, we favor attitudes of prudence over aggression. A very practical method of prudent action is rebalancing to realign portfolios back to prior levels of suitable risk. This has the benefit of taking profits from assets that have grown aggressively while re-establishing a long-term portfolio allocation that fits your return/risk balance. A secondary benefit of rebalancing during periods of strength is the creation of “dry powder” to be opportunistic in the future.
As stated above, we believe the current trends in the market are unique and bouts of greater volatility and corrections are likely to be a part of the future. As those events unfold, opportunities are likely to present themselves as fear-based investors overreact and create heavily discounted assets with great prospects for future appreciation. This is when the prudent investor could act from a position of strength and create added value for the portfolio over time.