Markets are getting shaken up by the prospect of a recession and/or crisis. Inflation spent all summer going away but suddenly oil prices are near $100 and the boogieman is back.
The powers that be (The Fed) are shaking in their boots as well. This week Neil Kashkari echoed some of Powell’s hawkish sentiment by foreshadowing hire interest rates deeper into next year.
Other than lingering fear as the US enters its most important quarter, it has been a fantastic run for investors with a sunny disposition.
Stocks +20-30%
Bonds got crushed. But what a time to buy, with rates at nearly 20% year highs. I’ll take 5% at 0 risk all day.
So why the spookiness?
There’s a lot of fear that the US will undergo (another) “credit event” this year. Most armchair economists point at the US Real Estate Market, Banks, and rising interest rates.
We can dive into these credit fears in another episode but today I want to talk about the cost of being too spooked to act. The US economy has been crying recession for over a year and continues to do so into 2024.
The below examples break down what amounts cash holdings would have generated in returns by asset class over the course of the year with a 50/30/20 portfolio return simulated last.
Here’s an approximate breakdown of how much a certain amount of cash would have produced this year if invested in different asset classes. This illustrates the cost of inaction by staying in cash. Red indicates investments that produced net losses due to high inflation. Green indicates asset classes (or portfolio blends) that generated real returns.
Ignoring asset classes and rates, here are the ranges of money left on the table by portfolio size. On the low end, by investing in low-to-no risk assets you made the amounts in orange. The amounts in green are returns generated by investing in the S&P 500.
If you parked in cash this year, you got eaten away by inflation. Institutions don’t let this happen unless they need the cash on hand to buy something or pay for something. In many cases, institutions and the wealthy use debt for purchases anyway.
There is a positive spin for those that held cash like a lady clutching her pearls. You will be liquid if/when markets correct. Picking up great investments when sellers are panicking is how the best in the business do it. With so much fear present across public investments, Real Estate, and Alternatives a recession or credit event can produce incredible entry points.
Below we can look deeper at inflation’s impact across different assets and play with some fun scenarios.
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