Looking back to 2022, a time marked by climbing interest rates, faltering equity markets, and looming recessionary concerns, we went against the momentum by taking an overweight position in risk assets. A decision that proved prescient as markets reversed course and began an upward trend into 2023.
Throughout 2023, markets continued their strong recovery. The Federal Reserve signaled a shift towards rate easing, leading to a notable decline in the 10-year treasury yield from 4.2% to 3.3% over a six-month period. This setting paved the way for robust returns across various asset classes. Large-cap stocks surged by over 26%, international equities by 20%, small caps by 17%, high-yield bonds by 13.5%, and even intermediate-term bonds broke their two-year losing streak with nearly a 6% gain.
Entering 2024, the momentum persisted, particularly in large cap equities which continued to hit all-time highs. The reflation of interest rates saw the 10-year treasury stabilize around 4.22% as of this writing, with market sentiment heavily influenced by the Federal Reserve's rate decisions. There have been a lot of comparisons to the early 2000’s with this market, with how well large cap tech, crypto, and meme coins have done. While I can’t deny, these areas do scream that greed has reentered the market, this could be just an over adjustment. As we’ve written in the past, in the short term, markets are not logical, and have the tendency to over correct in both directions.
A more apt comparison, in our view, lies with the post-2020 era. Just as the market benefited from substantial fiscal and monetary intervention following the pandemic, current market optimism appears to hinge on expectations of renewed Fed accommodation and interest rate adjustments. At some point interest rates should decline, and the monetary adjustment should end. It is the timing that is in question.
Turning to our recent portfolio adjustments, we've tactically reduced equity exposure while favoring municipal bonds in after-tax accounts and short to intermediate term bonds in qualified accounts. Below, is a tangible example of our approach can be seen in the evolution of a hypothetical 60/40 portfolio over the past two years.
In early 2022 a 60/40 portfolio sat at an underweight to equity, until October, where we added between 7-9% of equity exposure. As markets did well throughout 2023 and early 2024, these portfolios moved to 72-74% equity, which is at the high point for our risk bands.
In our March 2024 rebalance, we prudently adjusted this portfolio back to its original risk target of 60% equity and 40% fixed income and cash, mindful of tax implications and utilizing previously harvested losses to offset taxable gains. Essentially, taking some gains and moving them from risk to lower risk assets.
Moving forward, our outlook on markets remains long term optimistic, tempered by a keen awareness of potential shifts in fiscal and monetary policy. As we assess the economic landscape, the prospect of recession remains uncertain. Market pundits have persistently forecasted recession over the past four years, often inaccurately, leading us to exercise caution in joining that chorus now.
As always, thanks for reading and please don't hesitate to reach out if you have any questions or concerns regarding your individual portfolio.
Frank, Ed, & Tammy
Retirement Capital Advisors
800 Battery Ave SE
The Battery, Suite 100
Atlanta, GA 30339
Office- 412-722-3795
Securities and Advisory Services offered through Commonwealth Financial Network®, member FINRA/ SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network
This writing is for the clients of Retirement Capital Advisors only and not for general circulation. It is for educational and informational purposes only. All references to stocks, bonds, indices, market sectors, large cap stocks, small cap stocks, international equities, etc are for informational and educational purposes only. The narrative is purely illustrative and notional in nature and does not imply any guarantees to specific performance or specific numerical returns. Investing entails risk of loss including loss of invested principal.