Weekly Market Update August 26, 2022
Dow Jones Industrials 32,283.33 -4.22%, S&P 500 4,057.67 -4.04%
Nasdaq Composite 12,141.71 -4.44%, US Ten Year 3.024
The markets this week eagerly awaited Jerome Powell’s speech at Jackson Hole on Friday morning. Markets traded substantially lower following Powell’s roughly eight-minute speech, and as a result closed the week down. In his speech Powell doubled down on the central bank’s promise to raise interest rates. “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” Powell went on to say that even with a series of four consecutive rate hikes totaling 2.25%, this is “no place to stop or pause.” The market seemed to finally digest the fact that Powell and the Fed will continue to raise rates in the foreseeable future and that a tighter monetary policy will be in place for quite some time.
Given the current economic environment (rising interest rates, high inflation, recession fears looming) many of our customers have voiced concerns about owning U.S. stocks. Within equities, does it make sense to look outside of the U.S. for better growth prospects? The chart below shows how U.S. stocks (measured by the S&P 500) have performed vs all other global indexes since 2003.
Even though the U.S. economy has gone through some substantial negative shocks since 2003 (Financial Crisis, Covid, Current inflationary environment), the U.S. stock market has outperformed the “rest of the world” stock markets by a wide margin and continues to do so. This is not to say investors to go “all in” on U.S. stocks right now. But if you’re going to invest in stocks, we think the U.S. is still the best game in town.
OTHER OPTIONS – Treasuries can be an excellent alternative
For those investors who still prefer to stay out of the equities market and sit on cash, we would highly encourage you to speak with us regarding a short-term Treasury bill strategy. One of the positive aspects of the Fed’s fight against inflation has been a rise in short-term yields for U.S. Treasuries that are at levels we haven’t seen in many years. A six-month Treasury at the time of writing is yielding 3.21%. These securities are exempt from state income tax rates, which causes the effective yield to be even higher for states with high income tax rates (for New York for example, the highest tax rate is 10.9%, which would equate to an effective yield of 3.6%). These securities are also very liquid and can be converted to cash overnight. Lastly, these securities are considered risk-free because they are backed by the full faith and credit of the U.S. Government. The punchline is this: If you are sitting on cash and plan to do so for some time, please speak to your advisor – M&R can put together a plan to get you a respectable return on this cash – we are opening and managing these portfolios for a minimal management fee.