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The Paper Trail: Diversify Your Diversifiers | bps and pieces
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Proponents of active management strategies maintain that funds tend to beat indexes when markets are in a downturn, but that hasn’t happened this year, according to Morningstar research that’s cited in a Barron’s article. Out of almost 3,000 active funds, just 40% of them beat their passive counterpart in the 12 months spanning from June 2021 through June 2022. In 2021, when markets were much calmer, that rate was 47%.
As the bear market marches on, the main question becomes how much the risk of recession has already been priced into earnings. Comparing current earnings forecasts to those from before the pandemic, 85% of S&P 500 companies posted higher forecasts earnings per share for the next 12 months than they posted in February 2020, while 81% are trading at lower multiples than their forecasts. That divergence could be due to the effects of the pandemic, when many top tech firms saw their earnings skyrocket, or from the lowered valuation of their future growth thanks to higher interest rates. But the divergence could also be the result of “recession prep,” where the risk to future growth is causing lower valuations, the article posits.
Stocks are down.
Bonds are down.
Gold is down.
The yield on the U.S. Treasury bond has gone from a low of 0.5% in the depths of the pandemic to close to 4% today. So, a bond investor today is getting 16x the yield someone got 2.5 years ago.
Investing is all about tradeoffs and each of the ideas above comes with a tradeoff and their own set of risks. It’s also a little disingenuous and easy for me to write about this now, after all these assets are down as much as they are. But my point is not to suggest that now is a good time to reduce risk. It is to give those investors who are lower on the risk spectrum some ideas to explore now or in the future as they seek conservative ways to manage their investments over time.