Investment Q&A

Posted on August 30, 2023

At Stark Community Foundation, we partner with Marquette Associates, an independent investment consulting firm specializing in advising nonprofits. 

Together, we thoughtfully guide the Foundation’s investments, implement our investment strategy and determine the right diversification of our nearly $350 million portfolio of assets. We recently asked Chris Caparelli, managing partner of Marquette Associates, a few common questions about today’s market. He and his colleagues will dive deeper into these market conditions during our investment webinar on October 24.

Q: How do you think the stock market is doing right now?

A: The stock market low of this most recent cycle was in the 3rd quarter of 2022, where in the first 9 months of that year, the S&P 500 fell into bear market territory, declining -24%. That was largely in response to the Fed’s aggressive monetary tightening, designed to combat the highest levels of inflation that Americans had seen in over 40 years. Across the course of the next 9 months, the S&P 500 gained +27% and came within a handful of percentage points of its all-time high, set at the end of 2022. Given how much distance the market has put between itself and the September ’22 lows, we are pretty comfortable in saying that was a cyclical low point that the market isn’t likely to retest anytime soon. We are cautiously optimistic about the forward return environment for stocks given relative fundamental strength. We don’t think, however, that the market can maintain the pace of recent gains, given that the bulk of returns this year have come from just a handful of underlying companies in the index.       

Q: What advice are you giving to your clients based on current market conditions?

A: At Marquette, we are firm believers that the primary driver of long-term return is asset allocation, rather than manager selection or any attempts to time short-term market movements. Relying on asset allocation to drive returns though, doesn’t mean that there isn’t anything to do in the volatile markets we’ve seen over the last few years. The most common advice we are giving clients at this point is to rebalance equity allocations back to long-term strategic targets, thereby harvesting profits from this recent run-up in stock prices, particularly if there is any visibility into cash flows in the short-term. Trimming a position in equities at a gain of +17% in the first six months of the year and depositing the proceeds in a money market fund earning 4-5% for the balance of the year until cash is needed, is a trade we would take all day long.       

Q: Now that things have calmed down with bonds since last year, what are your views on the bond market?

A: 2022 was indeed a terrible year for fixed income that saw the Bloomberg Aggregate index register a double-digit decline. Making matters worse for diversified investors was a breakdown in the typically stable relationship between stocks and bonds. Even in a year like 2008, while stocks were busy falling nearly -40%, bonds rose +5%, cushioning losses from stocks and providing investors with a much-needed source of liquidity. That was not the case last year, as rapidly rising interest rates caused steep losses in even the highest quality bond portfolios. Over the course of the last 18 months, the Federal Reserve has hiked short-term interest rates from 0% to 5.25%, which was a very rapid rise in a very short period of time. Although the Fed may be almost finished raising rates for this cycle, the effects of those higher rates have just begun to ripple throughout the economy. In the years since the financial crisis, money had been cheap and readily available for all sorts of economic pursuits. That is no longer the case, and as a result, businesses, individuals and capital markets must adjust to a world that once again has a real cost of capital.        

Q: With the big shift in current interest rates, how are you suggesting clients respond?

A: For investors, this new interest rate regime should be viewed as a significantly positive development. Although the path to get here through 2022 was painful, the ability to earn a meaningful return on some of the more conservative assets in a portfolio is a welcome addition to an asset allocator’s toolkit. Our current thinking on the topic comes back to that overall asset allocation that is expected to be the primary driver of long-term returns. Most of our institutional clients have a target return objective between 6-8%. Thinking back to 2021 when short-term interest rates were zero and a 10-year U.S. Treasury bond paid less than 2%, bonds were not a terribly useful asset class from an asset allocation standpoint. You can’t have much of an asset that is projected to return 2% if the top-line portfolio objective is 7%. Today, the discussion is entirely different. After 18 months of interest rate hikes, that same 10-year U.S. Treasury bond yields closer to 4%. While that alone won’t achieve the long-term return objectives for most of our clients, it is a much more useful component of an overall portfolio. The higher yielding environment allows our clients the flexibility to build a more conservative portfolio, with more highly liquid fixed income, while still maintaining similar return expectations.  

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