Going back to basics can help keep your portfolio on track.
Our Top Market Takeaways for September 04, 2023
Spotlight
3 principles to guide investors
August slipped away. Summer has been a lot, but in all, the S&P 500 is up +8% since the start of June (and +18% so far this year), despite the similar surge in bond yields.
Investors seem to be more focused on a brighter outlook ahead. Optimism around a “soft landing” for the U.S. economy has been growing, inflation is cooling, some of the heat is coming out of the labor market, corporate earnings have been solid, and firms are focusing more on the future with investments around AI, infrastructure and the like. Nonetheless, the volatility reminds us that risks remain—around the knock-on effects of higher rates, debt dynamics, China, and the list goes on.
So after a summer of market swings, it’s important for investors to remain focused on what matters. Predicting where the market might be headed can be complex and overwhelming, but the real key to investing can be as simple as having perspective and sticking to your plan.
Today, we want to step back and share three of our favorite investing principles to guide us through the end of the year and beyond.
1. Know your toolkit: Each asset has a role to play
If you’re building a house (or an IKEA bookshelf), you need different tools to get the job done. Your portfolio is no different. Whether it’s cash, stocks, bonds or alternative investments, each asset has a distinct role to play—and they work together to achieve your long-term goals.
This chart shows that equities and fixed income have outperformed cash and inflation. The data, which depicts the growth of $100 in global equities, core fixed income, treasury bills, inflation, and the LTCMA projection, from 1991. This shows that global equities and fixed income are significantly over the projected performance of the rest, with dollar values of ~1000 and ~400 as of 7/31/2023 respectively, and continue to widen the gap in projected years. For the Global Equities line, it started at $100 in 1992, and increased to $283 in 2000. It then decreased to $193 in 2003. It increased to $401 in 2007, but then decreased to 221 in 2009. It increased and peaked at $1023 in early 2022. Then it came down and troughed at $763 in September 2022, before increasing again to $996 in July 2023. For the Global Core Fixed Income line, it also starts at $100 in 1992 and exhibits steady growth to $420 in 2020. The line then dips to $330 in September 2022, before recovering slightly to $350 today. For the U.S. Treasury Bills, the line starts at $100 in 1992 and increases steadily, seen at $190 in 2009. It continues to increase through 2021 at ~$205, at which point the Inflation line crosses over it. For the U.S. Inflation line, it starts at $100 in 1992 and steadily increases to 154 in 2008. It then increases to coincide with the Treasury Bills line in 2021 at $205. From that point onwards (into the projected years), the Inflation line is above the Treasury Bills line. The LTCMA Projection for each of the above lines are as follows: - The Global Equities line starts at $973 in 2023 and increases to $2444 in 2034. - The Global Core Fixed Income line starts at $348 in 2023 and increases to $567 in 2034. - The U.S. Treasury Bills line starts at $212 in 2023 and increases to $274 in 2034. - The U.S. Inflation line starts at $220 in 2023 and increases to $292 in 2034.
Cash: Everyone needs it—from paying for your morning cup of coffee to your down payment on that house. Many also often think of cash as a safe haven, or when interest rates are high, as a source of income. But because of inflation, cash comes with a cost. This means that while cash is a critical part of just living life, it’s also important to think about how much you really need to hold, and what can be invested to achieve other goals. For instance, over the last 30 years, cash and short-term Treasury bills have barely kept the pace with overall inflation, and have failed to keep up with the cost of important goods and services such as gasoline, medical care and education.
Stocks: Owning equity means owning a stake in a company and its future. So when you own stocks, you tend to benefit from earnings growth as well as the dividends companies pay to reward you for being a shareholder. For instance, since 1991, earnings and dividends have contributed over 97% of the cumulative 2,465% return for the S&P 500, with changes in valuation driving just under 3% of that total return. Over time, equities can provide the highest expected return and drive capital appreciation for your portfolio, but they also come with higher volatility.
Bonds: Fixed income provides stability. Because bonds offer you coupon payments over time, in addition to returning your initial loan amount, they help to reduce uncertainty and volatility in your portfolio. The risk is that the issuer does not pay you back, but defaults are exceedingly rare for investment grade debt (over the last 10 years, default rates have averaged around 2% for corporate bonds). Overall, fixed income should deliver higher total returns than cash or inflation. It should also provide lower volatility than equities, but the potential for material capital appreciation is also lower.
Alternatives: Hedge funds, private equity, real estate and other real assets can provide beneficial characteristics to portfolios. Adding alternatives can potentially increase returns while reducing volatility—but they also might come with the cost of locking up your money for longer.
In all, each has a role to play, and diversification across asset classes is the key to consistent returns.
2. Volatility is normal: Don’t let it derail your plans
Investors should expect pullbacks—both big ones like 2022’s rout (which was the worst for U.S. stocks since the Global Financial Crisis), and small ones like we felt during March’s bank stress or this month’s summer dip.
But despite these selloffs, stock markets have rewarded long-term investors. The S&P 500 has suffered an average intra-year pullback of -14% over the past four decades, with 16 of those 44 years seeing even steeper losses. Yet the full-year return was positive in 33 of 44 years (75% of the time).
This chart shows how stocks tend to reward long-term investors by showing S&P 500 intra-year declines (max drawdowns) & calendar year returns. The bars represent the calendar year returns. 1980: 25 1981: -10 1982: 16 1983: 17 1984: 0 1985: 26 1986: 17 1987: 0 1988: 13 1989: 26 1990: -6 1991: 24 1992: 8 1993: 7 1994: -2 1995: 33 1996: 23 1997: 26 1998: 30 1999: 18 2000: -9 2001: -13 2002: -24 2003: 27 2004: 9 2005: 4 2006: 13 2007: 3 2008: -41 2009: 30 2010: 12 2011: -1 2012: 13 2013: 30 2014: 14 2015: -1 2016: 8 2017: 19 2018: -7 2019: 30 2020: 15 2021: 22 2022: -20 2023: 18 The dots represent the S&P 500 intra-year declines (max drawdowns) 1980: -17 1981: -18 1982: -15 1983: -7 1984: -13 1985: -8 1986: -9 1987: -34 1988: -8 1989: -8 1990: -20 1991: -6 1992: -6 1993: -5 1994: -9 1995: -3 1996: -8 1997: -11 1998: -19 1999: -12 2000: -17 2001: -30 2002: -34 2003: -14 2004: -8 2005: -7 2006: -8 2007: -10 2008: -47 2009: -28 2010: -16 2011: -19 2012: -10 2013: -6 2014: -7 2015: -12 2016: -8 2017: -3 2018: -20 2019: -7 2020: -34 2021: -5 2022: -24 2023: -8 There is also a “YTD” note and an arrow from that note pointing to the last bar which is at 17 for the current year of 2023.
So while the “risk” for stocks is volatility, the reward comes with the “return” of long-term capital appreciation.
3. Maintain a long-run mindset
Over the short term, assets have a wide range of possible outcomes. Over the long term, we believe the possibilities are much more certain, offering the chance to recoup losses and continue building your wealth.
For example, while the return for U.S. stocks over any given 12-month period has been as low as -41% and as high as +60%, a blend of U.S. stocks and bonds has not suffered an annualized negative return over any five-year rolling period throughout the past 70 years.*
Range of stock, bond, and blended total returns Source: Barclays, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management. Returns shown are rolling monthly returns from 1950 to 2022. Stocks represent the S&P 500 Shiller Composite, and Bonds represent Strategas/Ibbotson government bonds and corporate bonds for periods from 1950 to 2017, then the average of Bloomberg U.S. Aggregate Total Return Index and Bloomberg U.S. Treasury Total Return index from 2017 to 2022. 50/50 portfolio is rebalanced monthly and assumes no cost. Analysis is based on the J.P. Morgan Guide to the Markets – Principles for Successful Long-term Investing. *Actual worst 5-year rolling return of hypothetical 50/50 portfolio: -0.068%. Data as of December 31, 2022. In each scenario, it shows the maximum and minimum annualized returns in that specific timeframe. On a 1-year period, it shows that for stocks the maximum return is of 60%, while the minimum is -41%; for bonds, the maximum return is 39%, while the minimum is -15%; and, for a 50/50 portfolio, the maximum return is of 47%, while the minimum is of -21%. On a 5-year period, it shows that for stocks the maximum return is of 30%, while the minimum is -6%; for bonds, the maximum return is 22%, while the minimum is 0%; and, for a 50/50 portfolio, the maximum return is of 23%, while the minimum is of 0%. On a 10-year period, it shows that for stocks the maximum return is of 21%, while the minimum is -4%; for bonds, the maximum return is 15%, while the minimum is 1%; and, for a 50/50 portfolio, the maximum return is of 17%, while the minimum is of 0%. On a 20-year period, it shows that for stocks the maximum return is of 18%, while the minimum is 5%; for bonds, the maximum return is 12%, while the minimum is 2%; and, for a 50/50 portfolio, the maximum return is of 14%, while the minimum is of 5%.
So even though markets can always have a bad day, week, month or even year, history suggests investors are less likely to suffer losses over longer periods—especially in a diversified portfolio. But that said, keep the time horizon of your goals in mind. If you need the money in a year, you should have a very different portfolio than if you don’t need the money for 20 years.
Above all, make a plan with intent
Often, one simple question is the most important and hardest to answer: What is the purpose of your wealth?
Do you need cash to feel comfortable? Do you need to invest in assets that boost your income? Are you more concerned with building wealth for future generations?
The things we want to do with money—our goals—are at the root of why we invest in the first place. Principles like the ones above can help increase the probability that investors achieve those goals.
This chart showcases how we build portfolios that achieve the intent of your wealth. The question, “What is the purpose of your wealth”, has several aspects that are shown. These are Cash, Spending, Income, Perpetual growth, and Opportunistic.
Your J.P. Morgan team is here to ensure your portfolio achieves the intent of your wealth.
*Actual worst 5-year rolling return of hypothetical blended allocation is -0.068%.
All market and economic data as of August 2023 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice..
RISK CONSIDERATIONS
- Past performance is not indicative of future results. You may not invest directly in an index
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
