Dow Jones | 41,763 |
S&P 500 | 5,705 |
Nasdaq | 18,095 |
2 Yr Treasury | 4.16% |
10 Yr Treasury | 4.28% |
10 Yr Municipal | 3.03% |
High Yield | 7.06% |
Dow Jones | 10.81% |
S&P 500 | 19.62% |
Nasdaq | 20.54% |
MSCI-EAFE | 7.30% |
MSCI-Europe | 6.40% |
MSCI-Pacific | 7.60% |
MSCI-Emg Mkt | 11.60% |
US Agg Bond | 1.86% |
US Corp Bond | 2.77% |
US Gov’t Bond | 1.90% |
Gold | 2,755 |
Silver | 32.81 |
Oil (WTI) | 70.50 |
Dollar / Euro | 1.08 |
Dollar / Pound | 1.29 |
Yen / Dollar | 153.21 |
Canadian /Dollar | 0.71 |
The last two years have been the most chaotic years for investors since the 2008 financial crisis. Closing out 2021, our biggest concerns included the ongoing pandemic, the most severe inflation outbreak in over 40 years, possibly the craziest housing market ever and technology stocks crashing. Four months later and those same issues remain, but we can tack on bonds entering a bear market, the broad stock market experiencing a correction and Russia invading Ukraine.
When the market is correcting, investors have three options: do more, do less or do nothing. Humans are wired to “do more” when things don’t seem to be working. If we aren’t seeing progress in the gym, we work out more. If we aren’t seeing the grades we want in school, we study harder. If we aren’t seeing the scores we want on the golf course, we practice more. Unfortunately, investing doesn’t work this way. The more you “do” with your portfolio, the more likely you are to make a big mistake and realize worse results. Having a game plan for market corrections is crucial to successfully enduring and taking advantage of them. Investors who manage their portfolio based on emotions will undoubtedly make mistakes that they will never be able to recover from. My personal rules and guidelines for weathering a bear market are:
Pick a target to invest new money. This could be as simple as saying if the broad market drops 10%, I am going to invest 10% of my available cash or take a portion of my bonds and rebalance to stocks. The numbers and mechanics aren’t as important as having this rule set in stone so that when it happens, you have an agreement with yourself to take advantage of sale prices.
Go bargain shopping. If you own an investment that has experienced a significant decline, do you still like the investment’s long-term outlook? If so, does buying more of it while it is on sale make sense? If you are prepared to hold it through it’s decline, adding exposure can make the recovery quicker when things rebound.
Tune out the noise. As investors, we are fed information every second of every day. Our phones alert us at every news headline. We can check the balance of our portfolio anytime, day or night. Much like staring at your garden, it isn’t going to grow any faster the more you look at it, but it will add to your stress level.
Don’t buy insurance after a wreck. When the market starts declining, my email inbox gets filled up with sales pitches for the world’s best “hedging” or “protection” products. Things that offer “downside protection with upside participation”. Buying a product like this after the market has experienced a decline does a great job capping any upside you will receive when things rebound. The more you try to suppress volatility, the more future return you sacrifice.
Cash only feels good temporarily. Selling and going to cash is the worst thing you can do. Even if you get it right and avoid the next leg down, trying to figure out when to get back in is even harder. Nobody picks the tops and bottoms with any consistency and by the time things have “calmed down” the market will have most certainly rebounded higher.
Everyone’s risk tolerance, time horizon and financial plan is different, the important thing is to understand your situation and have a plan in place to follow when things get challenging.
Equity Overview
Stocks are off to a bumpy start to 2022. Entering the second quarter, the impact of Covid-19 on the global economy is beginning to subside. Entering the second quarter, investors face significant new challenges including Russia’s invasion of Ukraine, soaring inflation and a Federal Reserve that finally appears ready to start tightening monetary policy. In the early months of 2022, the stock market experienced a sharp correction falling nearly 15% by early March. By late March, however, stocks had recovered much of their losses finishing the quarter down only 5%.
The financial market implications of Russia’s invasion of Ukraine have been relatively contained so far, however, the longer the conflict lasts and the further it escalates, the potential for more widespread shock is heightened. In the U.S., the biggest impact we have felt is higher energy prices. While higher energy prices hit the consumer’s wallet at the gas pump, energy consumption in the U.S. has been declining for years, so far muting the overall impact to the economy.
Inflation has been more persistent than many originally anticipated. This has been amplified in 2022 due to the conflict in Ukraine and China’s ongoing Covid shut downs, extending ongoing supply chain issues. It is expected that by the end of 2022 we have some relief on inflation, but the longer high inflation persists, the stickier it gets. It should be expected that core inflation remains well above 3% through 2023. This inflation, combined with a very strong labor market, has forced the Fed’s hand to move quickly on interest rate hikes. In March, the Federal Reserve increased the fed funds rates by .25% and signaled potentially six more rate hikes in 2022.
Despite the issues the world has experienced over the last two years, the stock market continues to be resilient. After being down nearly 15% in the early parts of March, the S&P 500 sits around 4,580, or about 5% below all-time highs. This is after experiencing gains of 31%, 18% and 28% in 2019, 2020 and 2021. To say we were due for a pullback is an understatement. LPL Financial recently lowered their S&P 500 target from 5,100 to 4,900 due to the combination of higher interest rates and the potential for further escalation in Ukraine. Despite this change, our investment committee continues to favor stocks over bonds and cash. Based on the uncertainty overseas, LPL has downgraded international and emerging markets equities and continues to favor U.S. stocks.
Fixed Income Overview
The current inflation and interest rate picture caused a sharp spike in bond yields in the first quarter of 2022, resulting in negative returns across most bond sectors. The persistence of inflation suggests the Federal Reserve will be tightening for the foreseeable future, further pressuring bonds over the next 12-18 months. The 10-year treasury was near 2.5% at the end of March, up nearly 1% from the start of the year. Although rising interest rates cause pain for bond investors, higher bond yields would be welcomed from a longer-term investment perspective. As the economic cycle matures, bonds can still play a role for investors looking for diversification. Much like the equity side of the portfolio, expectations should be moderated as bonds outperformed for many years with low and falling interest rates.
Please do not hesitate to reach out with any questions or comments you have!