Where do we go from here?
Today in the middle of May as I write, the S&P500 sits just north of 4,100. It has been used as a good gauge of market value and direction; it is basically a measure of the performance of 500 of the most successful American public companies. For perspective on where the market sits today, at the end of 2019 the S&P traded around 3,200. That was 3 months prior to the Covid crash in March of 2020. If you had invested money on December 31, 2019 at 3,200, you would have averaged just over 5.5% annualized return over the last 4.5 years. Including dividends, that return would be slightly higher. Interestingly, few of us would think of our investments in that linear fashion: we experienced the Covid crash, the resulting runup to the end of 2021, the big negative of the first half of 2022, and a sideways market since the second half of 2022.
So where do things go from here? That is the million dollar question.
For starters, the outlook for bond markets have improved since the end of 2021. Interest rates have gone up, which means yields on bonds have gone up. The bond market went through its worst performance in decades due to the increase in yields (which reduces the tradeable value of a bond all other things being equal), but now that the increase has happened the opportunity to earn a reasonable yield has improved. The caveat on the bond outlook is increasing rates beyond where we are right now. If central banks decide they need to go further than they have currently indicated to quell inflation, we’ll see the potential for further falling bond values. But with that will come increased opportunity for yield going forward.
In terms of equity markets, we seem to be in a bit of a holding pattern as illustrated above. There is uncertainty around long term inflation, interest rates, and the potential for recession. If financial conditions worsen, we’ll likely see lower equity prices. If they improve we’ll likely see a rising market.
There are times when market direction can seem obvious, this is not one of those times. Balance between these 2 assets classes is likely a prudent approach for the 2nd half of 2023 until longer term trends become more clear. The best course of action is always to understand your long term cashflow and net worth forecast, and design your portfolio to meet those needs accordingly.