The Summer Looks Good on You
For family vacation this year, we went to the Northeast. Spent a wonderful week in Boston, New Hampshire, Maine, and Vermont (yeah, it was a whirlwind). We ended in Burlington, VT which is right on Lake Champlain. What a beautiful place with bike trails, parks, and good food.
The trip was a nice break from the past year and a half of craziness in our world. COVID wasn’t rampant at the time, and we spent an afternoon on the Freedom Trail in Boston learning about the courage and willpower of our forefathers, much more enjoyable than our current political situation. Of course, central intelligence was a little simpler in those days, with Paul Revere using lights to signal “one if land, two if by sea” when the British were coming.
Despite the backdrop of COVID, Afghanistan, and all the talk about social issues, the market has largely shrugged it off. Why? The first time around, COVID shutdowns caused a significant slowdown. But this summer the impact has been more muted. And while the recent events in Afghanistan are unsettling, the impact on financial markets is low. With interest rates still at historically low levels and bonds at all-time highs, stocks are the best game in town. The S&P 500, NASDAQ and Dow Jones Industrial Average are all at or near all-time highs.
Which begs one other question we are getting: why invest in bonds? This is a great question and one we’ve grappled with at our weekly investment meeting. I think the answer is best given through one word: correlation. Brian uncovered an outstanding matrix that Guggenheim Partners put out.
If you follow the first column down to the bottom, you can see the correlation between Investment Grade Bonds and the S&P 500 is -.06. This means they are negatively correlated. Or, bonds go up when stocks go down. Practically then, if the S&P 500 and its components were to drop, it’s likely bonds would go up, or at the very least go down much less than the S&P. The result is a portfolio with less volatility and more stable long-term returns. The only other two assets that are negatively correlated to the S&P are foreign currencies and cash – the former is hard to invest in, the latter is the surest way to lose to inflation. 😊 Because the bond market has also risen substantially, we moved our bond portfolios to actively managed “multi-sector” funds where fund managers have wide latitude to pick bonds they find attractive. We think this is the best approach in the current environment.
In closing, like you, we are nervous with all the upheaval including social, political, and monetary challenges. At the same time, the market tends to go up over time as long as the US economy grows. And bonds cushion and stabilize drops. It’s against that back drop that we continue to invest and believe tomorrow’s market will generally be higher than today.
We are in the office each day. If you have any questions, feel free to give us a call.
Jared
Brian Kellett, brian@kellettschaffner.com. Phone 513-312-6067
Dave Bodnar, david@kellettschaffner.com. Phone 513-258-6973
Jared Kline, jared@kellettschaffner.com. Phone 513-768-2238
Kellett Schaffner Wealth Advisors LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Kellett Schaffner Wealth Advisors LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Kellett Schaffner Wealth Advisors LLC unless a client service agreement is in place.