January 2022 was quite a frightening first month for investors. Stock headlines read as follows:
- Stocks Plunge After Fed Minutes Show Central Bank Could Remove More Stimulus
- Stocks Plunge As Wall Street Flooded With Uncertainty
- Stock Rebound Fails And Futures Plunge On Earnings: Markets Wrap
And those sensational headlines were similar for bonds.
- U.S. Yields Surge After Fed Minutes; 5-Year Hits Highest Since Feb 2020
- January's Treasury Losses Were Brutal, But It May Be Just The Start
Indeed, put the combination together of “plunging” stock prices and “brutal” bond losses could mean awful stagflation like we had in the late 1970s and early 1980s, where both stocks and bonds did poorly.
- Dow Futures Plunge As Bond Yields Shoot Higher, While Oil Hits A 7-Year High
- US Economic Prospect Is Bleak, May Slip Into Stagflation In 2022
If I believed these headlines, I’d sell all of my stocks and bonds, and bury the cash somewhere in my backyard. But I look at things with a little perspective.
The magnitude of the so-called January stock plunge that happened on multiple days totaled 6.03% as measured by the Vanguard Total Stock Market ETF (VTI). That’s not even close to a plunge in my book. And the “plunge” in the Vanguard Total International Stock ETF (VXUS) was less than half of that, at 2.83%. Thinking long term, the so-called plunge was barely a blip on the following graph.
The “brutal loss” in Treasuries as “rates surged” resulted in a 2.63% loss as measured by the iShares U.S. Treasury Bond ETF (GOVT). In perspective, the “surge” in interest rates looks as follows:
The so-called “brutal” increase in the 10-year Treasury Bond happened when rates rose from 1.52% all the way up to 1.78%. Rates are still below the prepandemic level of 1.92%, where rates were at the end of 2019 when inflation was dirt low, rather than the current inflation not seen for nearly 40 years.
With some longer-term perspective, the January stock plunge and the brutal increase in interest rates barely moved the needle on these graphs. Yet these headlines and articles are enough to scare anyone to death.
After a 52.1% surge in VTI over the past two calendar years, it’s anything but a shocker that it would give up 6.00%. The far more shocking news in my opinion was the fact it increased 52% over the past two calendar years, given the economic news and political uncertainties.
The surge in rates is also pretty small over a long-term perspective. Could rates go back to the double digits of 40 years ago? Sure, but the bond market is clearly saying no, and as Morningstar’s John Rekenthaler said, “The bond market is right more often than wrong.” And the bond market has made fools of economists, who have a dismal track record of predicting the 10-year Treasury bond rate.
What This Means For You Now
If January gave you a queasy feeling for either stocks or bonds, imagine what a real bear market would do. I promise the headlines would be many times scarier than those in January. Maybe you should reduce your stock allocation and, if you’re afraid of bonds and think rates definitely will rise, consider CDs or even cash earning 0.5% in a high yield savings account.
But I recommend being smart enough to realize you aren’t smarter than the market, which tends to make fools of those who think they are. Think with a long-term perspective. If you can’t ignore those sensational headlines, try doing the opposite of what your instincts are telling you to do. When headlines create fear, show greed and buy. When they create greed, show fear and sell.
I don’t act on any of my instincts—I just create a balanced portfolio and stick to the targets set. I use the sensational headlines only as a source of ideas to write columns.
Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for Barrons, AARP, Advisor Perspectives and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.