#stockinvesting

We wrapped up September and boy was it one to remember but for all the wrong reasons. With fears of central bank over-tightening, the S&P 500 index dipped to a new 2022 low. The U.S. 10-year Treasury yield surpassed 3.8%, marking the quickest re-rating in daily yields since 2009. A 60/40 balanced portfolio of U.S. stocks and U.S. bonds is now down -20.2% year-to-date through September 30th, the worst return in nearly 35 years (the earliest we have total returns for both the S&P 500 and the Barclays Aggregate Bond Index is 1988). Maybe one positive is that everything is getting cheaper!

Here are 3 things you need to know:

1. While the Federal Reserve has done the equivalent of 12 rate hikes of 0.25%, the bond market has already priced in 5 more.
2. The yield-to-worst on the Bloomberg Barclays Aggregate Bond index has nearly tripled over the course of the year to 4.75%.
3. Only ~20% of S&P 500 companies have dividend yields higher than the U.S. 10-year Treasury yield (as of 8/31/22).

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); Bloomberg; FactSet; Goldman Sachs Asset Management.; John Hancock Investment Management.
2. 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.

By:  Thomas Steffanci, PhD, Senior Portfolio Manager

Some say it is a chaotic and frustrating time to be an investor. Rising employment and wages and resilient consumer spending are offset by rising inflation driven mostly by volatile commodity markets and supply chain disruptions. Higher corporate earnings estimates are being met by declining price-earnings multiples. And the Russia-Ukraine conflict raises unknown and unknowable geo-political risks. Stock prices inevitably were lower to reflect such a dismal environment.

All the bearish headlines have been overwhelming and lay the foundation for investors to get trapped in “confirmation bias”, the tendency to put more weight on information that supports a pre-existing view. There are many analysts and investors committed to the outlook that the global economy is declining, and stocks are headed for a massive move lower, and the Federal Reserve (the “Fed”) can make it worse.

It goes like this: Since the end of the second World War, the Fed has never successfully engineered a decline in inflation that was running more than 4% that didn’t result in a recession. This was because they had to break either the economy or the financial markets to reverse the previous cycle’s household wealth gains to reduce consumer spending and prices.

But the Fed’s recent public pronouncements about their future intentions, while only raising the Federal Funds rate to a range of .50% -.75% so far, have already forced 10-year bond yields up from 1.5% to 3% this year, causing the worse drop in bond returns since the middle of the 19th century. And most speculative equity positions have been wiped out such as the 78% decline from its high in Cathie Wood’s Ark Innovation Fund (ARKK), and cryptocurrency index fund Bitwise (BITW) falling from $100 to $15. Both the Nasdaq¹ and the Russell 2000² have declined by 30%. The Fed has already broken a lot of things. All of this has tightened financial conditions already.

So, is it highly unlikely that the Fed will push as hard as the market has already discounted? In fact, the Fed’s favorite inflation gauge, the personal consumption deflator (PCE), excluding food and energy, already peaked in February on a year-to-year basis.³ And the worry about surging wages pushing up inflation may be premature, as average hourly earnings have been declining on a year-to-year basis for the past three months.⁴ Existing and new home sales are falling sharply, and housing inventories have risen to a 9-month supply as mortgage rates are near 5%.⁵ Real income growth is negative and anecdotes from Amazon, Walmart and Target suggest retail inventories are close to being fully replenished even as overall consumption growth is decelerating.

All of this suggests a lower glide path for inflation, the size and extent of monetary tightening, and the diminished odds of stocks making a “massive move lower”.

1. The Nasdaq Composite is a capitalization-weighted index that includes almost all stocks listed on the Nasdaq stock exchange and is heavily weighted towards companies in the information technology sector.

2. The Russell 2000 Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.

3. Source: Bureau of Economic Analysis.

4. Source: Bureau of Labor Statistics and Tradingeconomics.com.

5. Source: National Association of Realtors and Tradingeconomics.com.

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.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your BFSG account holdings correspond directly to any comparative indices or categories.

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.

By:  Thomas Steffanci, PhD, Senior Portfolio Manager

Let’s cut through the ongoing cross currents of Wall Street and other pundits’ chatter about supply chains, the pandemic, the Federal Reserve (the “Fed”), and market volatility to concentrate on the proven drivers of stock market investing.

History attests to the maxim that if you don’t expect a recession nearby, stay invested in stocks. That sounds like a haughty claim, but it turns out to be true. The catch is when do we know a recession is around the corner.

Stock investors have underestimated the role of the business cycle in driving corporate earnings. There is a close and consistent relationship between business cycle indicators and the path of earnings and revenues, and these in turn drive stock prices. The empirical relationships are often dismissed as unnecessary noise to stock pickers until the business cycle spoils their investment plans.

Stock prices usually peak about six to nine months before the onset of a recession; so, if you think the economy is going to stay out of recession for the next 12-18 months, stay invested. In fact, over the past half century, except for the 1987 market crash, there has never been a decline in the S&P 500¹ of more than 20% outside of a recession.

Without recounting the economic and financial imbalances, and errant Fed policy, which led to previous recessions, suffice it to say this: Over-extended housing, capital spending, oil supply restrictions, along with strongly rising inflation expectations sow the seeds of recessions.

We do not believe that is the business cycle environment today. Much of today’s inflation is a function of unconventional supply-chain disruptions, which should ease as the pandemic fades, and the effects of prior fiscal stimulus will also diminish.

Monetary policy tightening cannot address those issues, which is why the Fed will likely take a far more measured approach in this environment, despite consensus handspringing about six or seven rounds of interest rate increases. Consumer survey-based three-year inflation expectations have only risen to 3.5% despite a year-to-year CPI at 7.5%.² There is also no glut of housing or capital spending weighing down economic growth. In our opinion, the seeds of recession have not appeared.

What we do have is a surfeit of liquidity no longer needed to foster economic expansion, and large Federal deficits that risk tax hikes that transfer private wealth to an already bloated government. Rising interest rates are the result. But absent runaway inflation, real rates are likely to remain subdued.

Market timing easily plays on our emotions in a way that overrides even the most well thought out plans. But if you stay calm, you’ll find that the likelihood of a positive return grows higher the longer you stay invested. Having a long-term plan, one that can work through market volatility, is one of the best ways to pursue your long-term goals and bolster your financial situation for years to come. While staying invested is the preferred overall strategy, careful asset class and security selection is required.

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.
2. Source: U.S. Bureau of Labor Statistics (https://www.bls.gov/). Federal Reserve Bank of New York Survey of Consumer Expectations (https://www.newyorkfed.org/microeconomics/sce#/inflexp-3).

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.