Markets | Bond Allocation Changes and the Housing Market

Market Slide Continues and What We’re Doing About It: For the 7th straight week, the market ended on a downturn despite a late rally. The S&P 500 rallied after sliding into bear market territory but is now down more than 18% since January amidst its longest stretch of weekly losses since 2001. The pessimism on Wall Street persists amidst persistent inflation and the Federal Reserve’s march toward normalized monetary policy. Our Investment Committee continues to both monitor and actively manage risk in portfolios as best we can, namely on the defensive (fixed income) side of the allocation. Historically, the bond allocation acts as the primary line of defense in times like these. As you may have noticed, though, traditional bonds have experienced a significant downturn this year. The Barclays US Aggregate, a broad-based index that measures a large basket of bonds, has sold off almost 10% year to date. High-quality corporate credit is off over 12% in this same period. Our approach over the last year has been to diversify the bond portfolio with several important changes dating back to Q1 2021. Here’s a quick overview of some of the changes we’ve made, which we’re pleased to report have helped to nicely offset volatility in this important part of portfolios.

• Dramatically reduced average maturities across bonds.
• Shorter maturities will enable reinvestment sooner at prevailing rates.
• Added allocations to bond-like alternatives such as Gold, Merger Arbitrage, Reinsurance & other alternative strategies.
• Eliminated all mortgage bond exposure.
• Increased composite credit rating of underlying holdings.
• Realized better tax efficiency by moving mutual fund assets into exchange-traded funds (ETFs). This will help to lower expenses as well.

Is the Housing Market Cooling? April marked another drop in house sales for the third straight month. Rapidly rising mortgage rates and record home prices also appear to be leveling off. Oxford Economics reported that the jump in mortgage rates is a major contributor to homebuying affordability (see chart). Experts forecasts assume a slowing economy that avoids recession and that still features a strong labor market with solid wage gains. But if the economy slows more than expected and labor markets weaken, home sales could undershoot the forecast. It’s a complicated housing market. But for those in the position to purchase, the overarching experience is difficult and frustrating.

Business Briefing:

• Recession? A growing number of banks and economists are warning that the U.S. economy could be heading toward a recession in the next year, The Washington Post reported Thursday. Early last week, an ex-Goldman Sachs chief executive warned of the “very, very high risk of recession,” and Wells Fargo CEO Charlie Scharf said there was “no question” a downturn was coming. Time will tell. (The Washington Post)
• Ukraine Aid: On Thursday, the Senate approved a $40 billion military and humanitarian aid package for Ukraine. The measure now goes to President Biden for his signature. The package marks a major escalation of the U.S.’s commitment to helping Ukraine resist Russia’s invasion. It provides $24 billion for Ukrainian forces and $5 billion for countries hurt by disrupted Ukrainian crop exports. (CNN, The New York Times)
• Soccer Offers Equal Pay: The U.S. men’s and women’s national soccer teams announced a collective bargaining agreement with the United States Soccer Federation that achieves women players’ years-long goal of equal pay. The new contracts, which run until 2028, call for pooling future World Cup earnings and sharing endorsement money and various other revenue equally. (CNN)