March Market Recap

Market Recap:

Equities fell in March both domestically and abroad, with the S&P 500 losing 5.09% while international (EFA ETF) and emerging markets (EEM ETF) were lower by 7.83% and 9.25%, respectively.

While the decline in international and emerging markets was greater, they remain positive on the year due to strong performance leading up to the attack on Iran.

What We’re Watching:

We’re watching two key areas that have very real long-term implications for investment portfolios:

1. The continuation of the long-term trends that began to take shape last year which include emerging and international market outperformance relative to the U.S., a weaker U.S. dollar, and higher commodity prices.
2. The possibility that stagflation continues to develop, meaning high inflation alongside a weak economy. 

These structural shifts sound scary on the surface, but what they ultimately mean is that a playbook change is most likely required for continued long-term investing success.

For decades, the investment advisor industry has focused on providing value on the planning side, optimizing retirement, tax, and estate planning, because most portfolios could be left on autopilot. While planning is always important, many people have forgotten that their investment portfolio provides the foundation for the long-term success (or failure) of their plan.

All the tax and retirement optimization in the world can’t fix a weak portfolio.

As previously discussed, the environment that shaped the outstanding returns of the last 40 years is shifting. Structural changes in inflation, interest rates, and global trade are calling for a long-term playbook change. One that manages risk closely, actively manages exposure, and includes meaningful diversification. For example, bonds and real estate do not diversify a stock portfolio in this environment.

Chart(s) of the Month:

As we often say, history doesn’t repeat but it often rhymes.

Below is a visual representation of how various asset classes performed in the stagflationary environment of the 1970s, a period that experienced energy shocks, significant stock market volatility, and high inflation. 

While the S&P 500 delivered some strong winning years, large drawdown periods were also common, highlighting the need for risk management and a dynamic portfolio. Commodities performed exceptionally well, an asset class that most long-term investors have little to no exposure to.

The following chart illustrates commodity prices relative to CPI, which represents inflation at the consumer level. Commodity prices often lead and drive consumer inflation. We should be prepared for the possibility of another significant wave of persistent inflation.