We recently recorded a 10 minute call, to talk through the selloff into future opportunity. I was joined by a couple of our expert PMs:
- John Luke Tyner, CFA Fixed Income Analyst/PM
- David Wagner III, CFA Equity Analyst/PM
Key topics covered:
- Double Whammy for Stocks + Bonds
- Bonds and Inflation
- Lower Equity Valuations
- Brighter Days Ahead?
Always fun, and for the benefit of the thoughtful advisors we work with and their clients. Full video and transcript below, beware transcribing errors and verbal slips!
The opinions expressed during this call are those are the Aptus Capital Advisors investment committee and are subject to change without notice. This material is not financial advice or any offer to sell any product. Forward looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. And more information about Aptus’ investment advisory service can be found in its form ADV Part 2, which is available upon request.
Derek
Good morning. Coming to you in late May here from Aptus. I’ve got Dave Wagner and John Luke Tyner, our equity and fixed income experts on the team, both CFAs. We’re going to talk through just a little bit about what’s going on with the markets. It’s obviously been a rough year, everyone knows by now that stocks and bonds are both down double digits, which just doesn’t happen. It’s unprecedented, especially just to start the year. It’s been straight from January 4th, both asset classes, which is where the bulk of people’s assets have just been steadily going lower.
So, thought we talked through a little bit about maybe how we got here, what’s driving it, talk about some of the things that we’re doing to maybe counter it a little bit, and then what challenges and opportunities we see ahead. So if one of the guys wants to chime in, maybe tell us how we got here?
Dave
I’ll let John Luke talk about how we got here, but to your point there, Derek, we’re in rarefied air right now. From a 60/40 stock bond portfolio or return spectrum, this is the worst beginning to the year that I’ve ever seen. I pulled up maybe the last eight periods where we had negative returns on the 60/40 portfolio dating back to 1977. This is the worst at over 11% now, and the second worst is 1977, which is down about maybe 4%. So this year to begin the year is given where bonds are, given where fixed, given where stocks are right now, we are 7% worse off on a 60/40 portfolio than we’ve ever been. So we’re in rarefied air right now.
John Luke
Yeah, and when you just look back to where we started at the beginning of the year, we knew things were murky with valuations that at basically record high, interest rates at record lows, and 40 year high inflation. And so our big call going into the year was that valuations probably had one way to go, and that was down. And we’ve seen that happen throughout basically the first five and a half, six months of 2022. Interest rates have risen dramatically, right? We started with the 10 year treasury at 1.5% at the beginning of the year. And we got up to a little over 3%, a couple weeks ago we’ve sort of petered lower, but it’s given an opportunity for better future returns, whether it’s stocks, whether it’s bonds, as well as what appears to be peaking inflation. And so I think from here, even though there’s been some carnage with the market, when you think about the forward looking return, which is what’s the most important thing, as we manage money, things are looking a little bit more attractive. There’s a rainbow at the end of the storm.
Derek
Yeah. I think that’s a good point to distinguish between a reduction in overall valuations versus a looming disaster that’s ahead in the economy. And it sounds like you guys lean more on the valuations have compressed, but business conditions are actually pretty decent. Anything you want to add detail wise to that?
Dave
Yeah. Obviously heading into this year, as John Luke said, we were going to get some type of normalization of valuation. We started here 21 and a half times earnings, we’re at 16 and a half times earnings right now. That just puts the current market valuation at a 10% premium to its 25 year history. So I fully agree with John Luke right now. I’d love to rather purchase equities at this valuation than where we were at the beginning of the year right now. And we’re finding those opportunities.
Derek
And fixed income wise. I mean, we’ve historically leaned away from the asset class just in the past few years, because rates have been so low. Maybe if you want to talk through some of the things that we’ve done and that we’re considering now that yields have, actually the 10 years, instead of being under 1%, it’s at least around three. You can get something for your money. So maybe if you want to talk about some of the things we’ve done and are considering doing, going forward.
John Luke
Yeah. And when you look at what we were given from an asset class perspective, it was really ugly going into ’22 and it’s still not amazingly pretty, but it is a lot better looking, especially with inflation coming back down. But we came into the year with a really short duration on our bond portfolio. And as we’ve gotten this nice spike in yield, we’ve been able to drastically increase the yield. We’re talking getting close to 4% yield on a four year duration type of profile, whereas we came into the year with a oneish year duration and less than a 2% yield. So it’s been attractive to be able to pick up yield as the opportunity has arisen. I still think that we want to get a little bit more of a lid on what inflation’s going to be moving forward, before we just load the boat with traditional fixed income. But how we approach fixed income that rise in yields has given us a really nice opportunity to enhance future returns by adding in yield at these levels.
Derek
Cool. Makes sense. Anything else? We’re sitting here late May, I know there’s a lot of fed speak right now. They seem to be trying to jawbone and at least set market expectations properly. Anything throughout the rest of Q2 that you think is really important and maybe even beyond?
Dave
Yeah. Look, the market is being driven by macro factors, it feels like right now, not fundamental factors. And as we continue to transition from a QE period to a QT period, we’re going to continue to expect the market to be quite volatile. So as the market transitions during that environment, and then you couple that with the fact that the market still doesn’t believe that we’re at some type of peak inflation, and obviously inflation right now is driving a lot of what fed chair Jerome Powell is doing right now. He’s been pretty draconian on a lot of this commentary regarding, “Hey, we’re going to continue to increase interest rates until, we’ve curb some type of inflation.” And my big takeaway from that is that, given you get that transition from QE to QT and that we haven’t hit peak inflation yet, that the market’s going to continue to be volatile. They’re going to continue to be choppy until we really put those things behind us. And we haven’t done that so far.
John Luke
Yeah. And just the opportunity that you have through the volatility to get money back to work from monetizing your protection or your hedges in the portfolios. It’s giving us the ability to layer in at these much more attractive, forward looking valuations. And so that’s really the biggest positive that we’re taking into the portfolios, is while cash might have been a better investment for the past five months, that rarely happens over long periods of time. But what we’ve done has just been as good as cash, where we’ve created cash with our profits from hedges and redeployed it back into the portfolios. And that’s been an occurrence that’s basically happened all year. It really happened in May, or the beginning part of May when we got the next leg down lower in the market. But it is attractive to be able to find some of these companies. Dave and I are talking every day about just how attractive some of these different equity positions look, especially when you look well into the future.
Dave
Yeah. I mean, we’re not here on this video being optimistic because we’re trying to call a market bottom. But we just know that so far through this year, as John Luke alluded to multiple times, that we still could be in this storm right now, but things look much rosier than where they were four or five months ago.
Derek
Well, it’s good to hear the optimism, because I know a few months back, there’s a lot of frustration on both your parts at the lack of compelling opportunities out there. So obviously price has reset on both sides of the ledger, and it sounds like you’re finding things that are at least a little more interesting at this point.
Dave
For sure.
John Luke
Yep, definitely. It is getting more exciting, Derek, and I think when you do have the ability that valuations are being reset and things are getting normalized, that does benefit people like us, that look for opportunities and can take advantage of what the market’s giving us from an opportunistic perspective.
Derek
Well, awesome. I guess before we go, I should probably read the disclosures basically letting you know that the opinions expressed during this call are those are the Aptus capital advisors investment committee and are subject to change without notice. This material is not financial advice or any offer to sell any product. Forward looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. And more information about Aptus investment advisory service can be found in its form ADV part two, which is available upon request. Anything else that you think we should be thinking about going forward? I guess just better days ahead?
Dave
Yeah. Just reach out if anyone has any questions, we’re always here to answer questions. The market yields, fixed income, really anything under the sun. So definitely utilize us as a resource.
John Luke
Yep. Thanks, Derek. Thanks, Dave.
Derek
Thanks guys. Good luck out there.
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