Both the Dow Jones Industrial Average and the Standard and Poor’s 500 Index closed lower for the third consecutive quarter after reaching all-time highs earlier this year. Inflation is higher than it has been in decades and the war in Ukraine grinds on. In spite of the headlines, we are optimistic about the longer-term outlook for the prospects of the companies that we select for client portfolios to continue to compete successfully in the global economy.
If you consider that the stock market has been in a secular up trend since 1995, despite the volatility, those who have owned a diversified group of high-quality companies, have fared very well versus inflation. The compounded annual return for the Dow Jones Industrial Average since January of 1995 has been 7.52%.* The cost of housing, according to the St. Louis Federal Reserve Bank has increased, annually and compounded at a rate of 4.62%** and inflation as defined by the CPI has averaged 2.59%***, also annually compounded, during the same time period.
For thirty-five years we have been repeating our conviction that having a proper asset allocation that includes cash reserves, will help smooth the effects of a volatile stock market and provide necessary liquidity for cash needs when markets are down.
At the close of the First Quarter of 2009 during the financial crisis, we concluded our quarterly letter with the following paragraph:
“Adequate cash reserves should remain a high priority despite low returns on money market funds. Controlling risk and limiting debt are essential elements of a long-term investment plan. While challenging economic times and market volatility may persist, our long-term investment strategy will continue to focus on leading companies with global operations, strong finances and records of consistent earnings and dividend growth. We are always upgrading and diversifying our clients’ portfolios in response to reasonable expectations for income growth and long-term capital appreciation.”
Our advice to you, our clients, remains consistent over the years and that advice is as sound today as it has ever been. We closed the same letter with the following:
“We are optimistic that better times are ahead. Please contact us at any times with your questions and comments.”
Sources: Yahoo Finance, St. Louis Fed, U.S. Bureau of Labor Statistics. Past performance is not indicative of future results.
Footnotes: *January 3, 1995-September 30, 2022; **Latest data available, through 04/01/2022; ***Latest Available through August 30, 2022
