Market Commentary - Tactical portfolio Adjustment

Aaron Williams, CFP®

If you read Kyle Thompson’s blog on March 14th of this year and recall that it began with “The start of 2022 has been volatile”, that recollection might make you chuckle given how much more significant the volatility has been in the three months that followed. Continued challenges pushed market performance further into the red during the 2nd Quarter of this year, marking the 3rd worst start to a year for a global 60/40 portfolio (60% in stocks / 40% in bond) in market history1.

Continued challenges facing the markets:

  • Fed ramping up the tightening of monetary policy (through increased interest rates)
  • Continuation of the war in Europe
  • Increase in energy prices
  • China's supply-chain constraints with continued lockdowns
  • Rampant inflation

Each of the challenges while individually impactful, combined to create a dismal view on the markets overall. Where bonds normally provided diversification benefits within a balanced portfolio, both stocks and bonds declined in lockstep over the first half of the year. I want to share just how historic this decline is, and how history can hopefully give us a glimmer of hope for things to come.

The above chart shows that a 60/40 portfolio is negative over a six-month period about 20% of the time; whereas seeing both stocks and bonds negative during that same six-month period has only occurred 3.6% of the time over the last 46 years. This disparity highlights that stocks typically are the more volatile asset class and their overweight, in this case, can cause the overall portfolio to be negative more often. But that 3.6% where both stocks and bonds are negative, that’s where we are right now. (see chart below2). Note just how rare it is for both stocks and bonds to be negative over the course of a 1-year timeframe.

We believe it is important to maintain a long-term focus when investing, but I wanted to briefly highlight these short-term results to show how much of an outlier the start to this year has been. When faced with outlier circumstances, it can be difficult to maintain a long-term discipline when it comes to investing. Market timing and trying to make portfolio adjustments with a short-term focus continues to be extremely difficult. Just imagine pulling funds out of a portfolio and missing the positive returns both stocks and bonds have recognized since June 16th.

We recognize that the drop in portfolio values this year has been painful, but at the same time, I think it is also pertinent to realize the law of averages. As we move forward it is plausible that this period of negative returns will be followed by higher-than-average returns.

Inflation Pressures Hopefully Crest

It is no surprise that rising inflation has been front and center in much of the financial media over the last year. Year-over-year inflation reached 9.1% at the end of June, but recent trends show that gasoline and oil prices are beginning to fall. I got gas the other day at under $4.00 a gallon for the first time in a couple of months!

See the chart below showing the inflation in energy costs making up nearly one-third of the overall inflation (CPI). If energy costs continue to decline to a more normalized level, we would expect overall inflation to drop as well.

Proposed Tactical Shifts

Now that we are keeping that long-term focus in mind, I wanted to share some of the portfolio adjustments that we are making within our models as these adjustments are less about finding potentially perceived inefficiencies in the current environment and more about recognizing the uncertainty that still exists within the markets today. These shifts continue a trend of recent adjustments to reduce active risk and add resilience amidst the current market uncertainty. This quarter we have three equity and one fixed income adjustment.

Equity (stocks):

  • Move to a neutral model target.
    • Our models are currently overweight 1% equities, but we started the year at a 4% overweight. We are going to eliminate this overweight and be true to the equity targets that exist within our portfolios. This is part of recognizing the potential for continued volatility and puts us in line with our benchmarks.
  • Reducing active sector tilts.
    • This is a part of returning to more of a balance across growth and value-oriented stocks, as well as reducing some of the tilts we have had toward specific sectors.
  • Maintain a preference for US stocks over international stocks.
    • Continued turmoil overseas, through war or other supply-chain constraints, has not given us a large sense of confidence in increasing our international exposure.

Fixed Income:

  • Increasing credit quality and adding duration
    • Rising interest rates continue to make fixed income a challenge. Increasing the credit quality in our fixed income investment will help to add some resilience to our portfolios. Increasing duration will actually be removing an underweight to more intermediate and long-term bonds that we have long held, thus putting us more in line with the benchmark.


We are continuing to rebalance client portfolios back to target. By not panicking in the current environment and making large, sweeping changes, portfolios should be able to participate in future market positive returns.

Thank you for your continued trust in our team and our process. As always, please do not hesitate to reach out if you have questions. Many of you with tax-deferred accounts will start to see trades in process now, and we will be trading many of our taxable accounts over the next week.

  1. Sources: BlackRock Investment Institute with data from Refinitiv Datastream and Bloomberg, Notes: The chart shows year-to-date to returns for the MSCI ACWI index (“Global equities”) and Bloomberg Global Aggregate index (“Global bonds”) since the start of the year, as of 7/8/2022. *The 60/40 portfolio is comprised of U.S. bonds represented by the IA SBBI US Gov IT Index from 1/1/26 to 1/3/89 and the Bloomberg U.S. Agg Bond TR Index from 1/3/89 to 6/30/22. U.S. stocks are represented by the S&P 500 Index from 3/4/57 to 6/30/22 and the IA SBBI U.S. Lrg Stock Tr USD Index from 1/1/26 to 3/4/57, unmanaged indexes that are generally considered representative of the U.S. stock market during each given time period. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results

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Would you like to discuss how much of an outlier 2022 has been so far? Feel free to give me a call!

Aaron Williams, CFP®
Partner | Senior Financial Planner | Chief People Officer


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Market Street Wealth Management Advisors, LLC [“MSWMA”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from MSWMA. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. MSWMA is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the MSWMA’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at Please Note: MSWMA does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to MSWMA’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a MSWMA client, please contact MSWMA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.