#bondinvesting

The Fed Funds futures market is pricing in roughly 10 quarter-point rate hikes this year. The benchmark 10-year yield was up +56 basis points for April. 2022 so far has seen the worst total return start for the 10-year Treasury (or proxies) since 1788, just before George Washington’s presidency. It appears that much of this tightening cycle has already been priced into the bond market – even though the Federal Reserve has only raised rates once so far.

Here are 3 things you need to know:

1. First quarter (Q1) gross domestic product (GDP) showed a -1.4% annualized real contraction. The contraction was due to weak inventory spending, a record trade imbalance (driven by a jump in imports), and a pullback in defense spending. However, consumer spending, which represents 2/3 of the economy, held up well in Q1.
2. The S&P 500 index lost -8.8% for the worst monthly showing since the March 2020 Covid-19 related selloff. The S&P 500 index has now fallen -13% during the first four months of the year, its worst start since 1939.
3. The tech-heavy Nasdaq Composite lost -13.3%, the most since October 2008 during the Great Financial Crisis of 2008-2009. The Nasdaq Composite is down -17% for the first four months of the year, its worst start to a year on record going back to 1971.

Sources:

1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov); Barron’s, Deutsche Bank, John Hancock Investment Management
2. Indices:
   • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
   • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
   • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
   • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

September marked a much weaker month for financial markets. Here are 3 things you need to know:

1. Inflation moderated across a few major categories that have been the most impacted by supply chain shortages and pent-up consumer demand, such as used cars, airlines and hotels. However, energy prices surged during the month with WTI oil increasing +9.5% for the month.
2. Expiring extended federal unemployment benefits did not bring a surge of job growth as expected. Robust wage growth suggests the weakness is primarily supply-side driven.
3. Signs of slowing growth and higher inflation brought up talk about stagflation. Arguments for a reflationary environment in 2022 in the U.S. include a healthy consumer and still-supportive monetary policy.

Sources:

1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
2. Indices:
   • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
   • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
   • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
   • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

By:  Thomas Steffanci, PhD, Senior Portfolio Manager

The Federal Reserve’s latest policy meeting last week finally put some meat on the bone by concluding they would start the tapering of their $120 billion monthly purchases of government securities. Though they were inexact as to the precise timing, it appears the program will begin in November and finish up by mid-2022.

But there were a couple of things in the Fed’s statement that took the market by surprise. The Fed issues a detailed quarterly summary of what members of the Federal Open Market Committee (FOMC) individually forecast about the next 3-year movements in inflation, economic growth, and the Federal funds rate. Those estimates are summarized in a Summary of Economic Projections (“dot plot”) where each of the 18 members (including Chairman Jerome Powell) map their projections on a three-year ahead calendar. It’s there where the changes since the June summary had market impact.

In their last “dot plot” in June, seven of the 18 members thought that the Fed should start raising interest rates by the end of next year, rather than in 2023. In the latest one, half of the committee determined that 2022 was more likely (when the tapering was finished). They also pushed their longer-term interest rate estimates higher. One reason appears to be that during the interval between June and September, annual inflation (CPI basis) rose to 5% as supply bottlenecks and rising wages continued to increase business and consumer costs. Elevated risks to their estimate of “transitory” inflation appear to have prompted Fed officials to begin their tapering and to revise their interest rate timing and to increase their interest rate projections. Market watchers dubbed this as a hawkish turn in Fed policy.

At the same time, however, employment gains slowed and high frequency economic data on retail sales and manufacturing and service activity weakened.  The specter of stagflation has begun creeping into economist’s lexicon, a legacy of the 1970’s. In previous meetings the Fed had emphasized that “substantial further progress” on employment would be needed for them to move to raise interest rates. In this meeting, the Chairman stated he is looking for “accumulating progress”, appearing to back off from his earlier statement.  With eight million people still unemployed and the slowing in employment gains, the Fed’s message seems to be that inflation is now a more pressing policy issue, especially if the gargantuan $3.5 Trillion spending bill is passed.

So, what has the market impact of all this been? Bond yields declined initially as some investors believed that the start of a less accommodative policy and a possible rise in interest rates in 2022 would forestall more rapid increases required later to confront inflation. But that sentiment didn’t last long. The Fed’s preparing to end its ultra-easy monetary policy has also signaled that the economy would continue to strengthen in the short term, putting upward pressure on interest rates, a view that shortly began to dominate bond market sentiment. Bond yields quickly turned higher. In fact, they have touched multi-month highs. And it didn’t help that several European Central Banks have either ended their bond purchase program (QE) or have begun raising rates.

Stocks were a different story. They reacted bullishly and interpreted the Fed moves as affirmation that the economy was on a solid growth path, giving confidence to expectations of healthy gains in corporate earnings. In fact, the S&P 500 registered its largest 2-day gain since mid-July at 2.2%. Small cap stocks (Russell 2000) rose 4.2% and banks have surged by 6 1/4%, indicative of investor confidence in the ongoing cyclical upswing. The long-term equity uptrend continues despite a changing Fed policy and an eventual rise in interest rates.

1. The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
2. The Russell 2000 Index is a small-cap stock market index of the smallest 2,000 stocks in the Russell 3000 Index.

Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Benefit Financial Services Group (“BFSG”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from BFSG. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BFSG is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of BFSG’s current written disclosure Brochure discussing our advisory services and fees is available upon request.