Investors have had to contend with a number of significant headwinds so far this year. We have seen a dramatic rise in inflation, and central banks having to respond by raising interest rates. Whilst developed markets' central banks remain hawkish, the Russian invasion of Ukraine and lockdowns imposed in China have increased inflationary pressures at the expense of short-term growth. These developments have added to supply chain difficulties, and central banks have found themselves forced to quell demand, causing a negative impact on both bond and equity markets.
Avrio's Chief Investment Strategist, East Bay Investment Services, has provided a bullet point overview of what is happening (returns are shown through May 19, 2022, unless stated otherwise).
- Inflation continues to cause concern around the globe. For example, while April’s CPI showing was 8.3% higher vs. 12 months earlier in the US, inflation rose by 9.0% in the UK, its highest reading in 40 years.
- It is likely you will start to hear the word ‘stagflation’ more and more, which simply means a period of higher inflation, high unemployment but declining growth.
- The Fed (and most central banks across the globe) are doing what they can to tame inflation. In the US, one of the main tools to fight inflation is raising the Fed Funds rate. The Fed is trying to pull off a “soft landing”, whereby they raise rates without causing a recession. There is much debate as to whether they will be successful.
- For the last 40 years or so, fixed income investors have generally been the beneficiaries of declining yields (prices move inversely to yields).
- YTD, fixed income returns have mainly been negative, mainly a result of rising rates across the yield curve, with the expectation that the Fed will continue to increase the Fed Funds rate until inflation is under control.
- Since May 6 when the 10 Yr Treasury hit 3.12%, it has fallen to 2.84% as of May 19 as talk of a possible recession has increased.
- There haven’t really been many places to hide in equities YTD. For reference, the MSCI ACWI, the broadest global equity benchmark, has fallen -17.3% YTD while the S&P 500 was slightly worse at 17.7%.
- International markets are roughly in line with US markets as the MSCI EAFE has declined -14.9% while the MSCI Emerging Markets index has fallen -17.1%.
- Growth stocks have fared worse than their value counterparts YTD. As examples,
- Russell 1000 Growth: -26.6%
- Russell 1000 Value: -9.4%
- Russell 2000 Growth: -28.0%
- Russell 2000 Value: -13.0%
What should I do now?
- Keep in mind that a balanced portfolio of 60% global equities and 40% global FI has declined -13.5% YTD. While no one likes negative returns, these types of experiences will happen from time to time.
- What is unusual is that in each of the other scenarios (e.g. 1987, 2002, 2008, 2020) stocks were down, but bonds were generally positive. This time both are moderately negative. This has led some to wonder whether bonds’ diversification power is waning, but the uniqueness of this year’s scenario does not lead us to that conclusion.
- With both equities and fixed income seeing negative returns, there likely isn’t much opportunity to rebalance.
- Focus on your overall financial plan and don’t get caught in the emotions of investing. Trying to time the markets is incredibly difficult and we have yet to find folks that do this consistently well. Remember, you have to time the market correctly twice, both when to get out of the market but also when to get back in.