Market conditions continue to present significant challenges as a sudden trend reversal two weeks ago has upended markets around the globe. While we continue to hold significant amounts of cash and money market assets in our risk-managed strategies, our limited purchase of some targeted assets in both stocks and bonds earlier in the month has led to more downside experience than we’d like.

Global stock and bond markets have been simultaneously weak, with both markets now down double-digits for the year. That’s really unusual, and hasn’t been so widely experienced since the late 1970s. We’ve been largely defensive for much of the year, with a minimum of 25% cash in our Appleton Group Portfolio (and it’s more conservative variants) throughout 2022.  We’ve once again eliminated exposure to large-cap growth (which is mainly technology) and have been holding half positions in large cap blend, large cap value, and developed international markets. Our broad exposure to foreign emerging markets was eliminated more than a month ago. Mid-caps and small-caps continue to be at our targeted amounts, but are among the smaller pieces of our desired asset mix.

What’s especially challenging in the current market is that there’s really no perfect solution right now. Stocks are weak, and are forecasting a recession later this year. High quality bonds are deteriorating, with the 30-yr U.S. Treasury bond down more than 18% YTD, and cash being eroded by inflation. The only silver lining is that there’s so much bad news already priced in that valuations are frankly pretty attractive; but even at these reduced levels, markets just can’t find their footing.

We’ve seen these downward reversals before: late spring 2000 (dot-com bubble), summer of 2001 (just before 9-11), winter 2008 (financial crisis), summer 2011 (U.S. government shutdown and loss of AAA credit rating), and of course smaller reversals when the Fed tried and failed to raise rates throughout the 2010s. In the past they’ve all been fixed by additional stimulus, but this time is different. Additional stimulus will only make inflation worse, and so the markets may be left to stand on their own two feet.

It’s exactly what I wrote about in my 2009 book On the Right Side of the Market. And it’s now being put to the test a decade later. Right now, our roughly 50/50 balanced asset mix is appropriate; but this dynamic market will require the patience that we haven’t needed in more than a decade.

Stay tuned for frequent updates…