Quick Market Update

Are you getting a little tired of me mentioning how interest rates and the Fed have been influencing the stock and bond markets? Well, I sometimes tire of it because it’s been on the radar for years now and that doesn’t seem to be changing anytime soon. Of course I’m kidding around a bit because I do love this stuff – it just sometimes feels like a feedback loop.

What does change, however, are the assumptions made by investors about the path of rates. Are they headed higher? That’s usually bad for stocks and bonds, depending on the context. Are they headed lower, which could be good for markets? But are they headed lower for the right reasons, which could be good or bad, again depending on the context? The details of this get finicky really fast but the bottom line is that interest rates and uncertainty around what the Fed might do with them is constantly impacting markets, just sometimes more than others.

For example, markets dropped last week following a higher-than-expected inflation report showing the CPI rising at a 3.5% annual rate in March (well over the Fed’s 2% objective for average inflation). This continued a string of upside surprises over the last four months. Inflation is down from its post-Covid peak of 9+%, but cumulatively prices are still a lot higher than in 2019. Maybe we were all (including the Fed) a little presumptuous when it came to rate expectations for this year?

I most recently mentioned this lingering inflation/Fed policy dynamic in my last Quarterly Update. Investors had been expecting 1-3 rate cuts this year assuming that inflation continued to fall and cuts in this context helped push markets higher during the first quarter. These hopes were if not dashed, at least reset to maybe 1 cut this year as inflation remained stubbornly high. I mean, how could the Fed cut rates with inflation rising?

So here we are yet again focusing on the Fed, what voting members of the rate-setting committee are saying, how they’re saying it, and so forth, while investors pick through it all for clues. This uncertainty and second-guessing stimulate an environment of heightened anxiety. As a group, investors have a habit of overshooting with their market assumptions during periods like this and the quick change in outlook over the last couple of weeks may prove no different.

You’ve probably seen this play out in your portfolio balances so far this month. We began the year with a string of mostly positive weeks but the last two have been down maybe a percent or so each. Yesterday the trading day began positive before turning sour as the session wore on with the S&P 500 and NASDAQ indexes each down over 1%. Today as I write the market is set to open positive, so fingers crossed for what’s become known as Turnaround Tuesday.

We’re only down a few percent from our recent high and well away from 10+% correction territory. Still, that negative bias doesn’t feel very good but there are a several things to remember as we go forward:

We just finished a solid quarter and 2023 was a good year for investors. Many institutional money managers were prepped to rebalance in the new quarter anyway, so that also helps explain why some investors sold stocks as the second quarter began.

Bond prices will likely be volatile for a while because of what we’ve just discussed. But this helps us when investing new money into bonds or when rebalancing from stocks since bond yields have been rising. The benchmark 10yr Treasury now yields over 4.6% and Treasuries of various maturities pay more in interest than nearly all companies in the S&P 500 individually pay in dividends: from 4-5% on bonds versus about 1.4% average dividend yield across the S&P 500.

Most stock sectors are no longer “overbought”, as they had been for an extended period, so lower prices can present good opportunities to start putting longer-term cash to work. This is especially true when considered over a longer timeframe. Dollar cost averaging new money into stocks can help here, too.

Interestingly, according to my research partners at Bespoke Investment Group, early-April has often been poor for stocks when the first quarter of the year was positive. There’s speculation that this is due to Tax Day as investors sell from their investment portfolios to pay taxes, but that could be coincidental. However, the performance dip during the first part of April has often coincided with the rest of the year being positive. This could also be mere coincidence but let’s take good news where we can find it, right?

Otherwise and as we’ve discussed before, these spikes in volatility and price drops could get worse before they get better but are nothing to be overly concerned about. Ultimately dips in the market, even market corrections, are part of a healthy long-term investing cycle.

Have questions? Ask us. We can help.