Stocks and bonds are falling while commodity prices are soaring. The Federal Reserve is raising interest rates, investors are not happy, and they are losing patience! However, I’m referring to 1994, not 2022.
In 1994, the S&P 500 fell 1.54% and, at one point, was down 9%, and long-term government bonds plunged by 7.8%. While traditional investments dropped, commodity investments rocketed, generating a return of 16.6%.[1] Sound familiar?
The previous year made 1994 so frustrating because stocks and bonds produced stellar returns. The S&P 500 jumped 10.1% in 1993, and long-term government bonds climbed 13.2%. Investors expected the good times to continue; they didn’t. Last year, the S&P 500 soared 27%, so this year’s negative returns are upsetting.
What happened in 1994? Alan Greenspan and the Federal Reserve surprised markets by raising interest rates, and Fortune Magazine called it the “Bond Market Massacre.”[2] The Fed Funds rate started the year at 3% and finished at 6% – a 100% increase. The Federal Reserve raised interest rates seven times from February 1994 to February 1995.
In 1994 the Federal Reserve was aggressively hiking interest rates, and a rising rate environment is not good for stocks or bonds. How did the markets fare since 1994? Investors poured money into the commodity sector because of its strong performance. With a strong economy and rising rates, investors chased this hot sector. However, those who bought commodity funds made 1.55% yearly from 1994 to 2022, barely outpacing inflation. A $10,000 investment grew to $15,450.[3] As a comparison, the S&P 500 returned 1,510% or 10.7% per year from 1995. A $10,000 investment grew to $160,540.[4]
Today, investors are frustrated by the lack of performance from stocks and bonds. The stock market is falling, bonds are dropping, and interest rates and inflation are rising. It feels like 1994 again, and investors are ready to jump ship and sell stocks and bonds.
Here are a few thoughts to protect yourself from doing something that may harm your long-term performance.
- First, do nothing. Don’t chase returns, and don’t make dramatic portfolio changes. The best course of action, at times, is to let your portfolio find its footing. The S&P jumped 37.6% in 1995, 23% in 1996, 33.4% in 1997, 23.6% in 1998, and 21% in 1999. If you sold your stocks in 1994, you missed an incredible run in stocks where they climbed 138%!
- Diversify your accounts. In 1994, international stocks – large and small, performed well, and real Estate Investment Trusts (REITs) generated positive returns.
- Buy bonds for your account despite rising rates. Bonds are a vital part of a portfolio, and they provide safety and income. Adding bonds to your account while interest rates rise is an opportunity to lock in higher rates. If you purchased long-term government bonds in 1994, you made 31% in 1995.[5]
- Rebalance your portfolio to keep your asset allocation and risk level intact. It’s also a great way to buy low and sell high. We screen our model portfolios weekly to look for accounts where the asset allocation has shifted from the original target, and when we find them, we rebalance the portfolio.
- A financial plan is paramount if you want to be a successful investor. It will help you stay focused on your goals, despite volatile markets.
I don’t know when stocks and bonds will recover, but there will be better days ahead if history is my guide.
But if we hope for what we do not see, we wait for it with patience. ~ Romans 8:25
April 15, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
[1] Dimensional Fund Advisors 202 Matrix Book.
[2] http://www.businessinsider.com/1994-federal-reserve-tightening-story-2013-1, Matthew Boesler, January 25, 2013
[3] YCHARTS
[4] YCHARTS
[5] DFA 2021 Matrix Boox