Financial food for thought – Saratogian

As represented by the Bloomberg US Aggregate Bond Index, fixed income returns over the past decade can only be described as abysmal.

The average annual return of the fund that tracks this index, the iShares Core US Aggregate Bond (AGG) ETF, was less than 1%. However, in part, this low interest rate environment that we seem to be emerging from has also been partly responsible for outsized stock market returns, as over the past decade the S&P 500 (SPY) has returned an average above eleven percent.

Excluding expenses, a portfolio with a weighting of 60% in SPY and 40% in AGG would have returned around 7% per year. This assumes returns of 11% and 1%, respectively. To achieve that same return in the current environment, with U.S. Treasury (fixed income) interest rates hovering around 4%, the average annual stock return (SPY) must not be equal to or greater than 9, 33%.

Additionally, in order to maintain their standard of living as well as their principal over a full economic cycle, many retirees plan to take 5% annualized distributions from their principal balance. Over the past decade, this person should have invested 76.67% of their portfolio in stocks.

Today, with rising interest rates, this percentage could be reduced to 56.66%.

If history is any guide, it looks like the TINA (There Is No Alternative) era is over, at least for a while. Doing some research, we found that since 1950, the average interest paid on the 10-year US Treasury note has been above 4% 75% of the time.

The conclusion from the above is that over the next decade, investors can expect to extract a higher percentage of their total return from the fixed income component of their portfolio. Savers are finally rewarded.

Keep in mind that when planning for retirement, the negative impact of inflation must be taken into account.

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According to a weekly survey by the American Association of Individual Investors (AAII), sentiment (a contrarian indicator) remained firmly bearish at over sixty percent of respondents for the second straight week. In the report, it was noted that “bearish sentiment was only above 60% four other times before last week and this week.

These dates were August 31, 1990 (61.0%), October 19, 1990 (67.0%), October 9, 2008 (60.8%) and March 5, 2009 (70.3%).

Historically, the S&P 500 has continued to deliver above-average and above-median returns over the six- and 12-month periods after unusually low readings for bullish sentiment and the bullish-bearish spread. Historically, unusually high bearish sentiment readings have also been followed by above-average and above-median six-month returns in the S&P 500.

The S&P 500 has underperformed after periods of below-average neutral sentiment, although the link is weaker.

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Bad news for Nike is most likely good news for inflation, as the sports shoes and apparel/athleisure maker’s shares fell on Friday after the company hit profits but saw its inventory rise by 44 % to reach $9.7 billion. Nike blamed the inflated inventory numbers on supply chain disruptions.

To that we would add a consumer who has moved from an environment where they stay at home, where they spend a lot of time shopping online, to an environment where they go out and do things. Either way, we think Nike will have to cut back its products significantly, which should help reduce the level of inflation over the next couple of quarters.

This weak retail environment echoes that of Target and shipping giant FedEx.

Please note that all data is for general information purposes only and does not constitute specific recommendations. The opinions of the authors do not constitute a recommendation to buy or sell the stocks, the bond market or any security contained therein. Securities involve risk and fluctuations in principal will occur. Please research any investment thoroughly before committing any money or consult your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell securities for itself which it also recommends to its clients. Consult your financial advisor before making any changes to your portfolio. To contact Fagan Associates, please call (518) 279-1044.

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