Welcome to the May edition of FAQ’s and RAQ’s!
Here we answer client questions -- some asked Frequently, and others asked Rarely.
FAQ: What would a recession mean for the stock market?
A recession might happen in 2023 due to the Federal Reserve’s aggressive rate hikes. But what a recession could mean for the stock market might be a surprise.
Historically, stock market performance during a recession is better than one might expect (see chart below). That’s because stocks typically fall in anticipation of a recession and start to recover before the recession ends.
So, an important question for investors today is how much recession risk was already factored into the stock market last year when the S&P 500 fell by as much as 25%.
FAQ: Now that short-term yields have risen, why not move my portfolio to cash?
Part of the answer is that yields on cash investments may not stay high.
Treasury Bills (a proxy for cash) have returned only slightly more than the rate of inflation over the long term. Inflation is high today, so yields on cash equivalents are high too.
However, if inflation falls, the return on cash could go down. In contrast, stocks and bonds have historically delivered better long-term returns than cash and, in our view, offer a better opportunity for investors seeking attractive long-term returns.
Today’s yields on cash can be both an opportunity and a risk. If you have specific cash needs, high interest rates are an opportunity. But high yields are also risk if they tempt investors to abandon a diversified portfolio.
RAQ: What are the “Transactional 25” countries and why do they matter?
Truthfully, this is an NAQ – Never Asked Question! But it’s important for investors to understand the emergence of the “Transactional 25.”
Two countries dominate the global economy: the United States and China. These superpowers have increasingly been at odds, leading some countries to pick sides. The U.K., Japan, and South Korea have aligned their economies with America, while Russia and Saudi Arabia have aligned with China.
But some nations want to stay economically neutral and benefit from trading with both sides of the divide. They also hope to profit as U.S. supply chains are diversified away from China. These countries have been dubbed the “Transactional 25”. India, Mexico, and Indonesia are three notable examples.
One takeaway for investors is that active managers may be able to add value in foreign markets by taking advantage of changing trade patterns and a shifting geopolitical order.
Thanks for reading! Have a question you’d like answered? Drop us a line at carlsongroup@bairdwealth.com