#bondmarket

Overall, January continued the strong bounce back seen for most global assets since October even if the performance seen in the first half of the month wasn’t quite matched in the second half. It was still the best January in several years for many assets. Here are 3 things you need to know:

1. Q4 2022 Gross Domestic Product (GDP) came in above expectations at 2.9%. The increase primarily reflected increases in inventory investment and consumer spending. Real GDP increased 2.1% in 2022.
2. U.S. inflation data released in January showed the rates of headline and core Consumer Price Index (CPI) slowed in December to 6.5% and 5.7%, respectively.
3. The following are selected examples of it being the best January since the year in brackets: US Investment Grade Corp Bond Index (1975), European Banks (best January since index started in 1987), the Italian FTSE MIB Index (1998), NASDAQ (2001), Copper (2003), the Shanghai Comp Index (2009), the Hong Kong Hang Seng Index (2012), the Euro High Yield Index (2012), the Stoxx Europe 600 stock index (2015), US Treasuries (2015), Gold (2015), and the Germany DAX stock index (2015). (Source: Deutsche Bank, Bloomberg Finance LP)

Sources:

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); Bloomberg; FactSet.

Indices:

• The Bloomberg 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.

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.

Stocks rebounded in March even as the Russia/Ukraine conflict continued to escalate. The key message from the Federal Reserve is that it is focused on fighting inflation and is prepared to hike short-term interest rates steadily and reduce its balance sheet until it reaches its goals.  Q1 earnings season will kick off the week of April 11^th and although Wall Street analysts have recently scaled back their expectations for quarterly earnings, they’ve been raising their forecasts for the rest of the year, according to FactSet.  Earnings typically are the key engine of equity returns over the long run.

Here are 3 things you need to know:

1. U.S. inflation data showed price increases hovering near 40-year highs. The report showed a further rotation back to services spending as the economy, and away from goods spending.
2. Jobs data showed a robust labor market with the unemployment rate dropping to 3.6% from 3.8%, while the labor force participation rate ticked up to 62.4%.
3. The 1^st quarter was one of the worst quarters for 10-year Treasury bonds since the early 1980’s. The Treasury yield curve inverted (higher yields for shorter-term bonds vs. longer-term bonds) between the 10-year and 2-year notes and 30-year and 5-year bonds, further stoking concerns of an impending recession.

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 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.

Global equities ended the year near record highs even as the current surge in COVID-19 cases surpassed peak levels last seen since the start of the pandemic. Here are 3 things you need to know:

1. The S&P 500 finished up +27% for 2021 hitting 70 all-time highs and completing its best three-year stretch since 1999 – “Let’s Go Crazy”!
2. Not everyone was “Partying Like It’s 1999”. The areas of weakness in 2021 were bonds across the board (both in nominal and especially in real terms), precious metals, and emerging market stocks.
3. Investors were “Still Waiting” for market volatility with only one 5% market decline in 2021 and no corrections. Will 2022 be the year “When Doves Cry”?

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 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 see important disclosure information here.

By:  Steven L. Yamshon, Ph.D., Managing Principal

The Federal Reserve (the “Fed”) bank knows that there is too much liquidity in the system but has mixed feelings about reducing it. My sense is that the Fed will need to see that the following five factors are in place before they do anything:

• An unemployment rate in the neighborhood of 3.8%;
• Prime-age (25-54) labor force participation close to its pre-pandemic level;
• Accelerating wage growth;
• Long-dated inflation expectations at or above target levels; and
• Non-transitory inflation at or above target levels.

All of the above factors have been accelerating, which leads me to believe that the Federal Reserve will start to first taper excess liquidity, and then begin to raise interest rates by the end of 2022.

If the Fed liftoff occurs as planned and unforeseen circumstances do not occur, we expect the 10-year Treasury bond to level off around 2% to 2.25%. To us, the message is clear, in an environment of rising interest rates, new buyers of bonds need to keep their duration shorter than benchmark duration. If the Federal Open Market Committee (“FOMC”) follows through with increases in interest rates, monetary policy will not become extremely tight until 2024. It is too soon to guess about the pace of tapering and the rise in interest rates, but the big move in financial markets will likely occur when interest rates rise above the equilibrium rate. We are not there yet.

If monetary policy will not be restrictive for approximately three years, we believe it is too premature to shift to a defensive position, especially if investors share our view that risk assets should perform well over the next 12-months.

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.