If you read Kyle Thompson’s blog on March 14th of this year and recall that it began with “The start of 2022 has been volatile”, that recollection might make you chuckle given how much more significant the volatility has been in the three months that followed. Continued challenges pushed market performance further into the red during the 2nd Quarter of this year, marking the 3rd worst start to a year for a global 60/40 portfolio (60% in stocks / 40% in bond) in market history1.

Continued challenges facing the markets:

  • Fed ramping up the tightening of monetary policy (through increased interest rates)
  • Continuation of the war in Europe
  • Increase in energy prices
  • China's supply-chain constraints with continued lockdowns
  • Rampant inflation

Each of the challenges while individually impactful, combined to create a dismal view on the markets overall. Where bonds normally provided diversification benefits within a balanced portfolio, both stocks and bonds declined in lockstep over the first half of the year. I want to share just how historic this decline is, and how history can hopefully give us a glimmer of hope for things to come.

The above chart shows that a 60/40 portfolio is negative over a six-month period about 20% of the time; whereas seeing both stocks and bonds negative during that same six-month period has only occurred 3.6% of the time over the last 46 years. This disparity highlights that stocks typically are the more volatile asset class and their overweight, in this case, can cause the overall portfolio to be negative more often. But that 3.6% where both stocks and bonds are negative, that’s where we are right now. (see chart below2). Note just how rare it is for both stocks and bonds to be negative over the course of a 1-year timeframe.

We believe it is important to maintain a long-term focus when investing, but I wanted to briefly highlight these short-term results to show how much of an outlier the start to this year has been. When faced with outlier circumstances, it can be difficult to maintain a long-term discipline when it comes to investing. Market timing and trying to make portfolio adjustments with a short-term focus continues to be extremely difficult. Just imagine pulling funds out of a portfolio and missing the positive returns both stocks and bonds have recognized since June 16th.

We recognize that the drop in portfolio values this year has been painful, but at the same time, I think it is also pertinent to realize the law of averages. As we move forward it is plausible that this period of negative returns will be followed by higher-than-average returns.

Inflation Pressures Hopefully Crest

It is no surprise that rising inflation has been front and center in much of the financial media over the last year. Year-over-year inflation reached 9.1% at the end of June, but recent trends show that gasoline and oil prices are beginning to fall. I got gas the other day at under $4.00 a gallon for the first time in a couple of months!

See the chart below showing the inflation in energy costs making up nearly one-third of the overall inflation (CPI). If energy costs continue to decline to a more normalized level, we would expect overall inflation to drop as well.

Proposed Tactical Shifts

Now that we are keeping that long-term focus in mind, I wanted to share some of the portfolio adjustments that we are making within our models as these adjustments are less about finding potentially perceived inefficiencies in the current environment and more about recognizing the uncertainty that still exists within the markets today. These shifts continue a trend of recent adjustments to reduce active risk and add resilience amidst the current market uncertainty. This quarter we have three equity and one fixed income adjustment.

Equity (stocks):

  • Move to a neutral model target.
    • Our models are currently overweight 1% equities, but we started the year at a 4% overweight. We are going to eliminate this overweight and be true to the equity targets that exist within our portfolios. This is part of recognizing the potential for continued volatility and puts us in line with our benchmarks.
  • Reducing active sector tilts.
    • This is a part of returning to more of a balance across growth and value-oriented stocks, as well as reducing some of the tilts we have had toward specific sectors.
  • Maintain a preference for US stocks over international stocks.
    • Continued turmoil overseas, through war or other supply-chain constraints, has not given us a large sense of confidence in increasing our international exposure.

Fixed Income:

  • Increasing credit quality and adding duration
    • Rising interest rates continue to make fixed income a challenge. Increasing the credit quality in our fixed income investment will help to add some resilience to our portfolios. Increasing duration will actually be removing an underweight to more intermediate and long-term bonds that we have long held, thus putting us more in line with the benchmark.


We are continuing to rebalance client portfolios back to target. By not panicking in the current environment and making large, sweeping changes, portfolios should be able to participate in future market positive returns.

Thank you for your continued trust in our team and our process. As always, please do not hesitate to reach out if you have questions. Many of you with tax-deferred accounts will start to see trades in process now, and we will be trading many of our taxable accounts over the next week.

  1. Sources: BlackRock Investment Institute with data from Refinitiv Datastream and Bloomberg, Notes: The chart shows year-to-date to returns for the MSCI ACWI index (“Global equities”) and Bloomberg Global Aggregate index (“Global bonds”) since the start of the year, as of 7/8/2022. *The 60/40 portfolio is comprised of U.S. bonds represented by the IA SBBI US Gov IT Index from 1/1/26 to 1/3/89 and the Bloomberg U.S. Agg Bond TR Index from 1/3/89 to 6/30/22. U.S. stocks are represented by the S&P 500 Index from 3/4/57 to 6/30/22 and the IA SBBI U.S. Lrg Stock Tr USD Index from 1/1/26 to 3/4/57, unmanaged indexes that are generally considered representative of the U.S. stock market during each given time period. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results
  2. https://ycharts.com/indices/%5ESPX/chart/#/?annotations=&annualizedReturns=false&calcs=id:level,include:true,,&chartType=presentation&chartView=&correlations=&dateSelection=range&displayDateRange=false&displayTicker=false&endDate=06%2F30%2F2022&format=indexed&legendOnChart=false¬e=&partner=basic_2000"eLegend=false&recessions=false&scaleType=linear&securities=id:%5ESPX,include:true,,id:%5EBBUSATR,include:true,type:security&securityGroup=&securitylistName=&securitylistSecurityId=&source=false&splitType=single&startDate=12%2F31%2F2021&title=&units=false&useCustomColors=false&useEstimates=false&zoom=custom&redesign=true&chartCreator=&chartId=&nameInLegend=name_and_ticker


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