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Commentary:   July  2022

Dennis C. Butler, President
Centre Street Cambridge Corporation

Private Investment Counsel

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    of all guest columns written by Dennis C. Butler, CFA                                                        

July  2022

ix months into the year we find the world beset by a confluence of challenges, including rising costs for energy and other commodities, a looming food shortage, and political challenges in countries that are normally considered pillars of international stability. We had an inkling of the trouble to come late last year, but the severity of what has occurred was beyond anyone’s ken. It is hard to believe that the S&P 500 reached an all-time high on January 3, 2022, as investment market sentiment has been transformed from enthusiasm to widespread doom and gloom, characterized by much “end-of-an-era” talk centering on reversals of cheap money policies and the end of a four-decade-long decline in interest rates. Its forward momentum braked, the S&P descended into “correction” territory (a decline of over 20% from prior peaks), making for the worst first half-year for the average since 1932, as one headline proclaimed, or at least since the inflation and energy crisis funk of the early 1970s. As of June 30, $9 trillion of U.S. stock market value had disappeared. What a difference a war and the lingering effects of a pandemic make.

We prefer not to take seriously the shrill prattle that emerges following notable market declines, including this year’s raft of doomster commentary. The comparison with a depression year, for example, is facile. 2022’s declines so far have brought us back to about where the averages were at year-end 2020, to a level consistent with the market’s upward trajectory since the 2008 crisis, and far from a depressed valuation. 1932 witnessed a climactic bottoming of stock prices when some companies had market values that were less than the amount of cash on their books; stockholders were possessed by fear that the Depression would extinguish many heretofore healthy businesses. The declines of the early 1970s, especially the 1973-74 bear market, were also far more damaging to valuations than the 2022 fall. Currently, economic activity remains reasonably healthy, earnings are positive, employment is high, and, as always, the ever-positive Wall Street analyst contingent is optimistic.

Not everything is rosy, however. Central banks around the world continue to reign in credit, and there are indications that these stricter policies are having an effect. Consumer spending is still healthy, but business investment may be in the process of stalling out. The U.S. housing industry, an important part of the American economy, has felt the impact of higher mortgage rates — currently around 6% for a thirty-year mortgage, as opposed to under 3.0% less than a year ago — and GDP growth has weakened. European economies, particularly in Germany, have been impacted by a natural gas supply crisis brought on by the Ukraine conflict. Emerging economies, such as those in Africa, are feeling the effects of the Ukraine War also, as both Ukraine and Russia are important exporters of foodstuffs into world markets. Indeed, there is much reason for concern, with this (and any other) armed conflict bringing a disconcerting element of unpredictability.

Nevertheless, as investors our perspective is much different from that of Wall Street soothsayers whose fears of further market weakness dominate the financial media and cause much hand-wringing. First, it’s important to note that six months of worry and uncertainty have already inflicted much damage on almost every financial market. U.S., European, and Japanese stock markets were all down about 20% by the end of June. Cryptocurrencies, for some strange reason felt by speculators to be a safe store of value and the subject of intense speculation in recent years, collapsed, with even the best known and most heavily traded of the crypto coins falling 56%. Other than commodities, which were buoyed by energy and grains, there has been no refuge for traders so far this year: even U.S. treasury securities, THE refuge in times of turmoil, lost value in the first six months of 2022.

Secondly, our focus should be to ask if declines to date have been enough to create interesting investment possibilities. Neither investors nor anyone else can know whether the markets will continue their downward trajectory. We can never know for certain where we are in a market cycle, nor do we know how much of the bad news that always accompanies bear markets is already accounted for in newly lowered prices. Given the intensity of this year’s gloom, and the end-of-times rhetoric it has inspired, we’d suggest that more bad news has been digested than most people think. With little fanfare, interest rates have declined over the past month or so. Mortgage rates are also slightly lower. Gauges of expectations for the future course of interest rates and inflation have edged downward as well over the last couple of months. Gasoline prices are a little cheaper in recent weeks, and there has even been some hint of a turn in stock prices. When markets cease reacting negatively to bad news, it could be the case that much of the worst is discounted.

Still, while such market reactions may be encouraging to traders, the idea that stocks may have reached a bottom is not a sufficient reason to invest. Certainly, some securities have suffered dramatic reversals, on the order of 90% or more. Speculative darlings, such as the so-called “SPACS,” deserved their comeuppance, although those willing to dig through the rubble in this or other hard-hit sectors may find good values. Otherwise, outside of a few individual cases, we still find the pickings to be slim, indicating the extent to which security prices had become inflated prior to 2022. If the bear market were to continue and erase more than the one year of gains seen so far (as in 2008-09), then things would indeed get more interesting.

The Demise of 60/40?  Flexibility in All Things

How an investor divides their financial assets into different security categories has a significant impact on their returns and future well-being. Placing all of one’s money in common stocks promises the highest return available to the general investing public, through price appreciation and increasing dividend income over time. Investing in stocks, however, entails the risk of permanent losses in individual issues, guaranteed variability, and a chance that business conditions or market sentiment could cause them to trade at depressed levels for extended and potentially inconvenient periods of time. Confining money to fixed-income largely eliminates many of these risks — high variability and permanent loss, for example — while introducing others. Bonds offer relatively stable cash flow, but no enhancement of capital value, so returns may lag inflation, resulting in a loss of purchasing power. Also, dabbling in low quality bonds does indeed introduce the possibility of permanent loss. Consequently, investment professionals usually suggest that people invest in some mixture of both types of securities: equities for principal appreciation to help maintain purchasing power and growing dividends, and fixed income to provide portfolio stability and cash inflow. There are many other security types, but they fundamentally correspond to equities (ownership) or bonds (loans), unless they are speculative trading vehicles which are inappropriate for most people.

Traditionally, advisors have recommended a 60/40 mix in investor portfolios: 60% equities and 40% fixed-income. It’s believed that this allocation offers adequate inflation protection, income, and sufficient cushion to dampen swings in stock prices, thereby helping to prevent panic selling and unnecessary losses. Historically this mix has worked as intended, providing decent, if unspectacular, results, but not in 2022. Stocks have suffered a decline of 20% or more, but bonds have been weak as well, undermining their “ballast” function in the traditional blend. Even U.S. treasury bonds, debt that is free of credit risk, have lost 10% of their value in 2022 (the worst result since the eighteenth century, according to an analysis by one investment bank). “Nothing worked,” said one fund manager of the year’s first half, and given expectations of further pain, disappointment with the old-fashioned 60/40 rule of thumb may grow.

We have long felt that the 60/40 mix is valuable as a starting point for analysis and discussion of this important element of portfolio construction. We maintain that anything done formulaically is a recipe for disappointment. There are investment factors that need to be considered, other than just the asset allocation; exactly what goes into each asset pot is critical. If in 2021 an investor paid the ridiculous prices for U.S. treasuries then on offer, the probability of poor outcomes was relatively high; 2022 merely provided the circumstances for that to unfold. The same could be said for buying stocks at the high prices prevailing in recent years. 2022’s disappointment, therefore, is due largely to the valuations prevailing in the prior period. No asset allocation would have been adequate to eliminate losses under those circumstances (unless you consider “luck” to be an asset class). Viewing this year’s negative returns as a “failure” of the 60/40 system is short-sighted: no method of allocating assets will work at all times, especially in some arbitrarily determined period that just happens to correspond with money managers’ client reporting cycles.

Over the long term, 60/40 offers a fairly simple approach that will likely prove adequate for most people (as long as they are not anxious to “beat the market”). Used as a starting point, and with intelligence and flexibility, and taking into account market circumstances, 60/40 may even serve as a basis for enhancing results; 60/40 could change to 70/30, 80/20, or even 100/0, depending on equity market levels and valuations. When stocks have declined significantly, and are suddenly sporting high dividend yields, it makes sense to own stocks rather than bonds that pay a fixed rate of interest which will never offer enhancement of principal (except to traders, and that is not guaranteed). As is often said, crises mean opportunities. As a starting point the 60/40 approach can provide a framework for seizing opportunities during the periodic swoons that sweep through the financial markets.


Dennis C. Butler, CFA, is president of Centre Street Cambridge Corporation, investment counsel. He has been a practitioner in the investment field for over 37 years and has been published in Barron’s. He holds an MBA from Wharton and a BA in History from Brown University. His quarterly newsletter can be found at <>.

Current low valuations reward the long-term view”, an article by Dennis Butler, appears in the May 7, 2009 issue of the Financial Times (page 28).   “Intelligent Individual Investor”, an article by Dennis Butler, appears in the December 2, 2008 issue of NYSSA News, a magazine published by the New Yorks Society of Security Analsysts, Inc. “Benjamin Graham in Perspective”, an article by Dennis Butler, appears in the Summer 2006 issue of Financial History, a magazine published by the Museum of American Finance in New York City. To correspond with him directly and /or to obtain a reprint of his featured articles, “Gold Coffin?” in Barron’s (March 23, 1998, Volume LXXVIII, No. 12, page 62) or “What Speculation?” in Barron’s (September 15, 1997, Volume LXXVII, No. 37, page 58), he may be contacted at:

Dennis C. Butler
Centre Street Cambridge Corporation
Post Office Box 390085
Cambridge, Massachusetts 02139

Telephone: 617.441.9695

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