Cornerstone's Investment Committee establishes and implements our investment strategy, sets investment policy, and continually monitors every element of the investment process.
The last several days in the equity markets have been a rollercoaster ride. The Dow Jones Industrial Average (or Dow) experienced its biggest gain since 2020 on May 4th, and its worst single-day drop on May 5th.
Factors that contributed to the drop were supply chain disruption caused by Covid lockdowns that still exist in China, the continuing conflict between Russia and Ukraine, uptick in inflation and the Federal Reserve’s recent interest rate hike.
The root of nearly all volatility is uncertainty – so the next few days or months could easily bring more. Although this may be unnerving, don’t be swayed by the noise of media headlines. While investing involves risk and there are no guarantees, stay focused on your unique, personal situation and remember that market downturns are not uncommon. We are here to provide you with insight and help you build a long-term plan and strategy to mitigate the negative impacts of market swings.
Investment Committee Meeting Summary - April 22, 2022
It certainly has been an interesting start to the year for the overall markets. Russia invaded Ukraine. Inflation hit a 40-year high. The much-anticipated rise in interest rates came in March as the Federal Reserve raised the federal funds rate for the first time since 2018. On top of all that, the U.S. stock markets closed their first losing quarter since March of 2020. The S&P 500 closed the first quarter down 4.9% and the Dow Jones Industrial Average was down 4.6%.
Heading into this investment committee, a topic that was one of the most concerning was the performance of the fixed income portion of the portfolio. Our goal is to always have a diversified portfolio of equities, not holding too much risk in any one stock or sector. Diversification within the fixed income space is just as important.
Each separate bond type responds differently in various conditions. Corporate bonds act differently than high-yield bonds. Long-duration bonds react differently than short-duration bonds. Our investment committee talked to professionals from Vanguard and Pimco to address our fixed income sleeve within the portfolios. The teams at Vanguard and Pimco both spent most of their time focused on inflation, something we have also been talking about over the past year. We have seen inflation at record high levels, and the Fed has begun aggressively raising rates. The overall concerns on inflation and interest rates have weakened bonds across the board to begin this year with the Barclays Aggregate Bond Index down nearly 10% year-to-date at the beginning of May.
While we have been disappointed with the overall returns of the fixed income market to begin this year, we were pleased with the feedback we received from Vanguard and Pimco regarding the overall allocations of our fixed income investments. Our hope is that rising interest rates will help bring inflation down to a moderate level before year-end. We ran scenarios of what the portfolios would look like by adding different sectors and decreasing duration versus increasing duration.
At the end of the discussion, we decided to hold tight for the time being in hopes that the moderate duration in the portfolio and a proper mix of strategies will produce the desired reduction of risk for our clients.
We evaluated our equity structure as well. The investment committee spent a great deal of time throughout the tail end of 2021 discussing the proper equity allocation. We made numerous transactions in 2021 reducing our exposure to growth and technology and increasing our exposure to dividend-payers. We are happy with the overall shift from growth to value within the portfolios.
We have been seeing extremely volatile markets, and we know this can be unnerving. We want the absolute best for you as our clients. We thank you for putting your trust in our team, and please let us know if you would ever like to discuss the overall risk within your portfolio. Call 605-357-8553 in Sioux Falls, 605-352-9490 in Huron, or email email@example.com.
Raymond James is not affiliated and does not endorse Vanguard or Pimco. Indexes mentioned are unmanaged and cannot be invested into directly. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. International investing is subject to additional risks, such as currency fluctuations, different financial accounting standards by country, and possible political and economic risks. These risks may be greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.