2022 Second Quarter Insights
The 4 Rules of Investing
1. “Investing is a marathon and not a sprint.”
2. “Do no harm.”
3. “Knowledge creates success; stay calm, objective and long-term oriented.”
4. “Choose carefully what you read and to whom you listen.”
“Part of the wage increase that is really powerful is that you are starting to create some real benefits around the wage gap.”
Rick Rieder, Blackrock CIO, Global Fixed Income, February 9, 2022
As I sit in my Red Bank office this cold, wet and rainy first Sunday of April, I’ve found myself reflecting on what a challenging first quarter it has been to be an investor. First off, I would like to express our thoughts and prayers for the people of Ukraine. During the first quarter, we have seen an investing environment that has become significantly less certain and more volatile. We have experienced a war between Russia and Ukraine that has created global uncertainty in so many aspects, most notably the result of higher Inflation and the ripple effect of sanctions throughout the global economy. The impact of the war was similar to pouring jet fuel on top of a small fire called Inflation. We have seen oil, natural gas, wheat, palladium and nickel prices soar, creating significant inflation in these markets and certain supply disruptions in the same commodities. We have seen U.S Bonds have the worst quarter in over 40 years with yields soaring and bond prices dropping, resulting in the Bloomberg Aggregate Index to post a negative 6% for the quarter while the longer dated treasuries lost over 10% during the quarter. Equities did not fare much better; after nearly a 13% drop for the S&P 500, all the major equity averages closed the quarter in the red. As for the additional negative events that have influenced the financial markets over the past quarter, we have experienced a yield curve inversion, talks of a recession, soaring borrowing rates and a significant drop in mortgage applications.
With all that being said, I would like to remind all that market bottoms are a function of price and time and that markets do not bottom on good news – they tend to carve out bottoms when the news flow seems like it can’t get any worse.
Interest Rates – Mortgage Rates – Housing
With the Federal Reserve initiating the first interest rate hike to the Federal Funds Rates in March (which was highly telegraphed in advance), the markets appear to be doing Chairman Powell’s lifting. Mortgage rates are one example of how the private sector is doing the work of the Federal Reserve. They have moved up from 3.22% in January to nearly 4.75% on a 30-year mortgage fixed mortgage - levels not seen since 2018. This increase is the private markets moving in anticipation of future rate hikes and will most likely result in a slowdown in home price acceleration, the refinance market, new home purchases and other related housing markets. Ultimately, the collective impact should curtail some inflationary pressures in housing as well as in the durables goods sector.
As shown below from our Raymond James Research Group, equity markets generally remain positive to the upside during periods of rising Federal Fund Rates.
Source: Raymond James
To follow up on this point, equity markets generally move to the upside during periods of slowly rising interest rate periods and strong economic conditions, as opposed to the exogenous events of war and sanctions which create a great acceleration in short-term inflation and massive supply chain interruptions.
Yield Curve Inversion
During the first quarter, we experienced a yield curve inversion of the 2-year Treasury yield and the ten-year Treasury yield. It is important to note there have been 10 inversions of this yield curve since 1976 and only 6 recessions. While this is something that needs to be watched closely, we believe Chairman Powell is more focused on the spread between the 3-month Treasury yield and the 10-year Treasury yield which has not inverted.
Source: StockCharts.com
Source: StockCharts.com
Oil
This week, President Biden announced that over the next six months he would be releasing one million barrels a day (180 million barrels in total) from the Strategic Petroleum Reserve (SPR). This coincides with some demand destruction occurring, most notably in Europe, as a result of elevated energy prices. This release from the SPR should help to alleviate some of the short-term supply issues surrounding crude oil and hopefully provide some modestly lower prices for consumers at the pump.
Secular Bull Market
Secular Bull markets often have cyclical bear markets embedded within them. The opposite is true of the period from 2000 through 2013. During this span, we had strong cyclical bull market rallies in a very large secular bear market where we experienced one of the largest bear market corrections during the Great Financial Crisis. As demonstrated in the chart below, the 200-day average for the S&P 500 can often depict the health of the markets during very noisy periods. The noisy environment that we are currently experiencing could very well be another consolidation period for the S&P 500.
Source: FactSet
Written by: Nicholas W. Sergio, AIF®
Founder & Chief Investment Officer • Banyan Wealth
Registered Principal & Financial Advisor • RJFS
2022 RJFS Leaders Council Member*
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Dow Jones Industrial Average (DJIA) commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russel 3000 Index, which represents approximately 8% of the total market capitalization of the Russel 3000 Index. BPS stands for Basis Points and refers to a common unity of measure for interest rates, one basis point is equal to 1/100th of 1% or 0.01% it is used to denote the percentage change in a financial instrument. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of capital might occur. All investing involves risk and you may incur a profit or loss of capital. There is no assurance any investment strategy will be successful. All information, data and analysis provided in this report is for informational purposes only and is not a recommendation to buy or sell any security. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete; it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. Any opinions are those of Nicholas Sergio and not necessarily those of Raymond James and are subject to change without notice. Raymond James does not offer tax advice and services. You should discuss any tax matters with the appropriate professional. Holding investments for the long term does not insure a profitable outcome. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer’s credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
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https://www.cnbc.com/top-video/
https://fred.stlouisfed.org/series/T10Y2Y