Areté Market Review Q422: Cash is King-ish

Stocks recovered a bit in the fourth quarter to partly salvage what had been a horrific year for 60/40 portfolios. Instead, it was just a really bad year. The big question confronting investors and advisors is, "Was 2022 just a bad year to look past or was it a harbinger of a different and more challenging investment regime?"

The answer implies very different courses of action. In the case of the first, little needs to be done. Markets bounce around and long-term investors should not alter their strategic direction due to a few bumps in the road. On the other hand, if the environment has become hostile to stocks and bonds, the mainstay of most investment portfolios, a serious re-evaluation is in order. So, which is it?

Batten down the hatches
One sensible and relatively straightforward way to address the question is by directly comparing the relative attractiveness of the three major asset classes of stocks, bonds, and bills (i.e., cash). This is the approach outlined by John Hussman in a white paper on strategic allocation and serves as the basis for a model I have adapted

Bond and bill returns can be projected based on current rates and basic assumptions about the longer-term drivers of those rates. Stock returns can be projected based on the current market price/sales relationship and basic assumptions about longer-term drivers of stock returns.