Bad Company

I recently switched to the classic rock station and happened to catch the tail end of the song “Bad Company” by the band Bad Company from their album Bad Company released in 1974. It is one of a handful of songs that shares its name with the band and the album. Hearing the song struck a chord with me because I saw some recent statistics about how both stocks and bonds have performed so far this year. Unfortunately, the performance finds itself in bad company with other years of difficult returns.

Stocks and bonds have been down for two consecutive quarters, and there have only been three other times in the last 100 years where this has happened. The last time was in 1974 when Bad Company was playing on radios across the US. Before that, it occurred in 1969 and 1953. So it is no stretch to call what we have seen thus far this year historical, as most of us weren’t around the last time markets saw this type of performance. Focusing on bonds for a moment, this has been a historic year as the Bloomberg US Aggregate Bond Index has logged its worst start on record, going back to 1976.

So with bonds and stocks performing poorly, what are investors to do about their portfolio allocations, and is the worst behind us?

The answer to the second question is the easier of the two to answer, as ultimately, no one knows. I could envision a scenario where the economy gets weaker as the year progresses, and the Federal Reserve is forced to do an about-face on its interest rate hiking campaign that helps bonds to erase their early losses, much like what occurred in the chart above in 1980. I could see other scenarios where the supply chain backlog eases and helps bring down costs for companies. Any number of scenarios could unfold that will bring about positive or negative consequences for stocks and bonds. Could the markets get worse from here? Sure, but if history is any guide markets perform strongly coming out of challenging times, both in stocks and bonds. The chart below illustrates this point.

The chart leads to the answer to the first question about how investors should be thinking about their allocations. Instead of speculating on what could happen in markets in the short-term, investors need to maintain focus on their long-term allocations. I know that easier said than done in these types of markets, but leaning into the planning completed on the front end will help maintain peace of mind during difficult markets. Should the opportunity arise to rebalance back to your long-term allocation target, then take it, regardless of what you think could happen over the next few weeks or months.

Indeed the first half of 2022 puts it in bad company with several negative years from the past. That being said, often, it’s periods just like this that we wish we could go back in time and “buy low.” What if simply reframing from a “bad year” to an “opportunity in disguise” helped us? Control what we can control, which is how we respond? Perhaps we put surplus cash to work by investing at lower prices. Maybe we use the negative first half to tax-loss harvest and mitigate portfolio taxes while keeping the portfolio consistent. I am reminded of a quote attributed to Napoleon, who defined genius as “the man who can do the average thing when everyone else around him is losing his mind.” It may be that simply not selling at low prices is the win our future self will appreciate. None of us can predict the next six weeks, months, or years, but evidence shows that as bad as the news gets today, the future for our investments looks even brighter.