How To Position Your Income Portfolio For 2023 with Covered Calls

After years of easy money policy from the Federal Reserve and a years long bull market that set record after record, the era of double-digit equity returns seems to be coming to a close. The chart below shows how correlated increases in the Fed’s balance sheet have been with equity performance over the last couple years.

The next two charts paint an even more glaring picture. We have enjoyed many years of historically low interest rates, and during that time the equity markets experienced truly explosive performance. The effective Federal Funds rate dropped below 1% near the end of 2008 and didn’t make it back above 1% until the middle of 2017. Between the start of 2009 and end of May 2017, the S&P 500 appreciated over 160%. After the short and violent drop driven by the onset of Covid in Q1 2020, the Fed stomped on the gas pedal and began rapidly expanding their balance sheet, driving the S&P up nearly 100% above May 2017 levels. When we came into 2022, the S&P was up over 400% from early 2009.

The Return of the Sleeping Bear

This year has brought the market down from the clouds and should drive sidelined investors who had been waiting for a dip to buy back into the game. Long-term investors know they need to maintain equity exposure and know too that most market dips, like the one we are currently experiencing, look like buying opportunities when viewed 10 years after the fact. Of course, it can be particularly difficult to buy into a troubled market when you’ve been sitting on the sidelines waiting for a chance to get in. Not to mention how tough it can be to throw more money into equities when you’ve seen your portfolio shrink by roughly 20% this year. While there is no doubt the market could potentially head lower still before it starts a long-term recovery, there are ways to start increasing equity exposure while buffering against potential downside.