Nothing stirs concern in investors more than a 1,000+ decline in the Dow Jones Industrial Average. That decline measured about 3% in the index of these 30 stocks - a significant correction to the 9.1% increase investors saw in the broader S&P 500 index in the month of July. The problem is that there has been a drought of good information for the global financial markets to match the drought of rainfall in most parts of the world.
Inflation is the problem, and defeating it is going to be challenging for the Federal Reserve, which is largely responsible for creating the inflation we are experiencing. It is true that supply chains, higher wages, historically low unemployment, government stimulus and the war in Ukraine have all played a part in driving up prices, but the Federal Reserve's ultra-low interest rate policy over the last 15 years created an environment where too much money is chasing too few goods and services. In late Spring, the Fed admitted that they were behind the curve in managing inflation, sending the markets significantly lower in June. The July rebound offered hope that the worst news was already "baked in the cake," and that it was time to consider buying stocks and bonds while they were on sale.
Speaking of bonds, the benchmark Bloomberg index of investment grade bonds has declined 10.19% this far this year. The previous worst year for this index occurred in 1994, when the index finished the year down 2.92%. Yes, you read that correctly. If we ended the year today, the bond market would register the worst returns in modern history - by about 3X. We have been hyper-focused on the bond market through these first 8 months, evaluating the funds we have historically recommended and making pro-active changes in our client model portfolios. When inflation stabilizes and eventually reverses, we will see increases in bond prices, and we are positioned with new lower-cost funds that will capture this broad-based recovery.
In late Spring/early Summer, we liquidated our higher risk bond funds and our favored international fund to de-risk portfolios and hold cash. Earlier this month, we added a position to a target outcome fund, Innovator Funds' U.S. Equity Power Buffer ETF, which protects the investment from the next 15% of declines, while offering up to 15% in upside from the date of purchase. This hedged fund will help us limit downside volatility in our client models while maintaining the opportunity to participate in a market recovery.
I've said in client meetings, and in retirement classes that I teach, that this period is truly unique. The last time we saw inflation this hot, many major economists, market strategists and fund managers were still in high school or college. The fact is, current market conditions have been reacting to a roll-back of policies that have been in place since the Great Financial Crisis of 2007-2009. These policies made it possible to recover from the Crisis, but also have created the current situation of rising prices. Many inflation indicators have eased - particularly in agriculture, energy (read: gas prices) and building supplies. And you have probably heard that the overheated housing market is beginning to cool. Whether or not we enter a recession is less important than knowing that the conditions that may create one are being addressed by the Fed. They certainly are.
We are committed to continuing to review and refine our investment strategy. As most of our clients know, we have long recommended principal protected and/or guaranteed income investments, and we know that these investments offer peace of mind in times like these. Fixed index annuities, other annuities with guaranteed lifetime income benefits, and principal-protected cash value of life insurance are three examples of strategies we have utilized to mitigate risks in the stock and bond markets to great effect. We will continue to use our financial planning stress-tests to ensure that each and every one of our clients is prepared for whatever occurs in the markets. One thing is for sure: just as surely as the drought in our weather will subside, so will the drought of good information for the markets. We are well-positioned for the recovery.