Last week we had mixed inflation data, credit downgrades, and the Nasdaq Composite had its first two-week losing streak of the year. Despite some of these recent negatives, there are reasons to be optimistic. On a recent podcast, the well-known asset allocator Bill Bernstein mentioned how he is now more optimistic than he has been in years, particularly how retirees could raise their withdrawal rates (“burn rates”). I agree. One key to that view was that interest rates are normalizing, and the bond market is providing higher yields. Consider it was just three years ago that 10-Year US Treasuries were yielding 0.5%. Now they are yielding above 4%. Another key, however, was that since the overall US market is expensive, global diversification is critical. This point was also stressed recently by another well-known asset allocator Larry Swedroe.
Diversification is always important, but in my opinion is even more important in this environment given current concentration risk in major indices, historically high valuations, and higher inflation volatility. Each of these suggests more diversification. To fortify the argument even more, investment research firm Strategas recently cited how the 5-year rolling correlation between stocks and bonds has turned positive for the first time in over 20 years. Though positive correlations between stocks and bonds were normal in the 70s, 80s, 90s, that has not been the case in recent decades. In other words, fixed income is not diversifying equity risk as well as it has. This is a major change in the markets, and again suggests broader diversification not only in international equities, but in diversifying asset classes such as global fixed income, alternatives and real assets.
Add it all up...
Stay invested. Stay diversified. Stay disciplined.