Welcome to our September Viewpoints, a monthly bulletin from PDS Planning to our valued clients and friends. Our goal with each issue of Viewpoints is to provide you with a wide variety of perspectives on life and wealth. Feel free to share with others.
- Patagonia: The founder of Patagonia, Yvon Chouinard, gave the company away. Instead of selling the company or taking it public, they have transferred all ownership shares into a specially designed trust and a nonprofit organization. The company is valued at $3 billion and earns around $100 million per year in profits. Under the trust, all profits are to be used to combat climate change and protect undeveloped land around the world. (Source: The New York Times)
- Inflation Data: Earlier in the week, August inflation data was released and it came in hotter than anticipated, increasing 0.1%. Though gas prices fell, most everything else became more expensive during the month. Dr. David Kelly with JPMorgan believes the continues disinflation of commodities (gas prices) will help bring prices down throughout the chain. (Source: JPMorgan)
- Railroad Strike Avoided: With the deadline looming, the largest freight railroads and union leaders came to a tentative agreement. With inflation already running hot, the agreement lifts what would have been a heavy weight to bear. Experts believe a strike would have cost the US $2 billion per day. (Source: WSJ)
- Since 2008: Mortgage rate officially passed 6%, the first time it’s been this high since 2008. Inflation paired with a hot real estate market has pushed home prices higher. Higher prices and higher mortgage rates mean many would-be homeowners can no longer afford it. The average rate has risen 3% since the end of 2021, adding about $550 a month to the cost of a $400,000 home. (Source: MarketWatch)
What’s happening in markets today?
The bad news has been outweighing the good news in a significant way. Equity markets are down around the world due to a whole host of reasons, and fixed income is following close behind. Historically, when stocks are down, bonds are holding steady or up, and vice versa. This is because the correlation between the two is generally low. The movement of one asset class has little to no relationship to the movement of the other asset class.
- A positive correlation would mean stocks and bonds move in the same direction, and the closer to 1.0 it is, the stronger the relationship.
- A negative correlation would mean stocks and bonds go in the opposite direction, and the closer to -1.0 it is, the stronger the relationship.
- A correlation of 0 means there is no relationship. The movement of one asset class does not impact the other.
As of August – and for much of the year – the correlation between stocks and bonds has been above average, near 0.50. They are moving together. And since equities are down, it’s no surprise bonds have followed.
Correlation provides a piece to the explanation, but in reality there are so many factors at play. So many, in fact, that 93% of all asset classes have a negative return year to date. As the chart below shows, 104 out of 112 asset class have lost money. And moving through the chart, it isn’t unheard of for a year like this to happen, but it is uncommon.
Investing right now can be pretty difficult since there is nowhere to hide. But that’s thinking about investing in the short-term. Over shorter periods of time, asset class returns can vary widely; however, long-term investors are typically rewarded for thoughtful portfolio diversification.
While we may experience continued seemingly random sprints of price volatility, rest assured the future is always the same. Maintaining a diversified allocation that is consistent with your long-term goals, combined with periodic rebalancing, has consistently resulted in beneficial long-term financial outcomes.
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