Public markets continue to present a challenging environment for investors as the Fed attempts to combat inflationary pressures not seen in the past 40 years.
Meanwhile, market performance over the past year paints a bleak picture: Through September-end, U.S. equities (S&P 500 Index) and Fixed Income (U.S. Aggregate Bond Index) were down 24%, and 15%, respectively, making this the first time in nearly 50 years both markets were in a downcycle simultaneously.
Economists are blaming the broader volatility on the tremendous macro and geopolitical uncertainty, leaving investors to tackle a set of questions that have a lot of factors at play.
The origin of these woes is clear — the pandemic and the disruptive effect it had on almost all industries, continue to threaten the economic stability of the world. Amid unprecedented circumstances, the U.S. government pumped trillions now into the economy during the peak of the health crisis — many now agree that the stimulus checks meant to jumpstart the flailing economy partly fueled the raging inflation that followed.
While the Fed continues to double up its efforts to rein in consumer spending by a series of rate hikes, investors are also left wondering how high they’re willing to go. Though an economic slowdown is necessary to cap inflation, many also remember the sore points it’ll entail: higher unemployment rates, lower consumer spending and overall GDP contraction. History also presents some lessons that serve as a warning– the last time the Fed tightened this fast, in the early 1980s under Paul Volcker, it plunged the economy into a devastating recession.
Moreover, interest rate hikes are the reason bonds are unable to balance the equity markets. Historically, fixed income has provided investors a safe haven during equity sell-offs – since 1976, the S&P 500 has had a negative calendar year return eight times and each time, the US Aggregate Bond Index was higher, with an average total return of 6.7%. But the last two years were an exception. Though bonds usually negatively correlate to stocks and provide protection to investors during periods of decline in the stock market, rising interest rates lead to falling bond prices at the same time. Therefore, it’s hard to avoid downturn in bonds as long as the Federal Reserve continues to hike rates.
Geopolitical concerns have also fueled the market volatility, adding to the uncertainty. Questions like “how long will the war in Ukraine and related market disruption last?” “what will be the impact of the upcoming general election?”are on the minds of investors who are considering the boomerang effect the resolution to these issues can have on market performance. With no easy answers or solutions in sight, many predict significant volatility will remain a fixture of traditional portfolios for the foreseeable future.
Amid this volatility, private markets have outperformed a traditional 60/40 portfolio. While 3Q22 returns aren’t available yet, private markets (equally weighted private credit, private real estate and private equity blended index) returned 2% during the first half of this year, compared to -16% for a traditional equities and fixed income portfolio. Industry professionals are also questioning the efficacy of a 60/40 going forward, with asset managers and pundit investors now suggesting private markets should represent at a minimum 20% of investors portfolios. At the same time, the young and wealthy are also seeing more potential in assets like cryptocurrency, real estate and private equity, with individuals aged 21-40 allocating only a quarter of their investments to equities.
Private Market Investing 101, with Kal Penn
History also has some lessons on how to navigate the current headwinds. PE funds– primary driver of private market growth – generally fared better than public markets during the dot-com bubble and the Great Recession, the two prominent market downturns in the years leading up to the pandemic, with a less significant drawback and a quicker recovery period.
At Yieldstreet, by nearly all metrics, we believe our investors are on track to have their strongest year to date, despite the broader economic downcycle. Specifically:
We’re one of the only private market platforms that publishes these realized returns for each of our individual investments. And we do it because we’re confident in our approach to our platform: we source opportunities that we believe are well-suited for the current environment, constantly launch new features to enhance the investor experience, and aim to publish content that not only updates but educates our 400K members. The goal is to have a truly holistic approach.
1 All investments involve risk, including the possible loss of capital. There can be no assurance that any product or strategy described herein will achieve any targets or that there will be any return of capital. Past performance is not a guarantee or reliable indicator of future results. Current performance may be lower or higher than the past performance data quoted. Any historical returns, expected or target returns are hypothetical in nature and may not reflect actual future performance. All performance and/or targets contained herein are subject to revision by Yieldstreet and are provided solely as a guide to current expectations.
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