Clearly the decline in the stock and bond markets has begun to create discomfort among investors who are certainly wondering when will the market stop falling and start climbing again. The account statement or your online portal are displaying numbers that make it look like we’ve lost one or even two years of growth. The NASDAQ is back to where it was back in November of 2020. The 20-year treasury is back to where it was when the FED was hiking interest rates in 2018. Bonds have offered very little value as a diversifier. Here’s a couple of chart from Franklin Templeton Investments. These are as of 5/2/2022:
Equities1 Week YTD 1-Year Close
S&P 500 ▼ -0.18% ▼ -13.1% ▼ -0.5% 4,123
DJIA ▼ -0.21% ▼ -8.9% ▼ -3.0% 32,899
NASDAQ ▼ -1.50% ▼ -22.2% ▼ -10.3% 12,145
Russell 2000 ▼ -1.29% ▼ -17.8% ▼ -17.0% 1,840
Foreign Stocks ▼ -2.78% ▼ -14.3% ▼ -11.4%
Emerging Markets ▼ -4.12% ▼ -15.7% ▼ -21.1%
Bonds2 Week YTD 1-Year Yield
10-Yr. Treasury ▼ -1.86% ▼ -12.9% ▼ -11.3% 3.12%
US Bonds ▼ -1.11% ▼ -10.5% ▼ -9.8% 3.62%
Global Bonds ▼ -1.26% ▼ -12.4% ▼ -14.0% 2.70%
Munis3 ▼ -0.75% ▼ -9.5% ▼ -8.7% 3.32%
So, what causing all this red ink? First and fore-most the greatest factor is the rate of inflation that has infiltrated our economy. Used cars, houses, asset prices, groceries, fuel are just a few of the areas where our expenses or costs to acquire have escalated and put pressure on our incomes to meet basic needs as well as desired wants. The YOY rate of inflation is about 8.3% as of today’s (5-11-22) report. If it were continuing to go higher I would be worried. It appears to be flattening out but didn’t offer the kind of directional change with magnitude that would cause the FED to pause or market participant to jump back in. The caution on the buy side is partly why the markets are falling. Remember that every transaction has two participants. For months there were multiple buyers for every available house, car and growth stock. The issue could be demand or supply. When demand alone is putting pressure on something of value prices rise until demand cools.
When the issue is on supply demand can be steady and normal but lack of inventory can cause prices to shoot up. That’s the issue we have currently is that supply on all sorts of items can’t keep up with normal demand. Supply chain disruptions and an over reliance on just in time inventory (JIT) were put to the test by the COVID Pandemic. China’s COVID policy of zero tolerance combined with new variants like DELTA, OMICRON and whatever we are calling the latest variation have made it difficult for anyone to get clarity about where we go from here.
So just like in 2018 when we had a 20% decline in the fourth quarter it was because the FED was hiking interest rates and corporate earnings became difficult to forecast. A price adjustment of 10-20% is normal under these circumstances. The market is worried about this list and increasingly added to the list would be recession worries:
• Federal reserving hiking rates
• Inflation
• Supply chain issues
• Ukraine
• COVID – see US and China Charts below
Bonds are not behaving like there is a recession on the horizon. So, if we had to go back in time and find a period that helps us understand what is happening to the markets I would choose 1991-1994. We had a recession that was short and sweet. It cost George Bush the presidency. Two years later the stock and bond markets declined together as interest rates rose. When things settled down the economy roared back to life and markets soared. It also corresponds to a time when the cold war was winding down and there was a global recovery from that as well.
I don’t have a crystal ball, but I do have experience helping clients rebuild wealth after these kinds of dislocations. Buying Yield, Writing Covered calls, Tax Loss selling, Roth conversions are just some of the ways we can take advantage of the current investing climate. Diversification, Dollar cost averaging and buying low and selling high are other more familiar ways. If you are worried, please call. We are not powerless so don’t lose hope. Keep the faith. We’ve lived through far worse and come out the other side better off.
As always if you would like to schedule a call to discuss your investments, please reach out us at 207- 847-4032 x100.