After an exceptionally rough start to 2022, the stock markets seem to be taking a short break from the ugliness we have continually seen until the past week. That’s a lot of negative days and very few positive ones so far this year. However, at the very least, this week has been a nice break while we wait for the next problem to arise. And right now, there appears to be quite a bit of negativity which historically has taken the market lower.
Our biggest concern right now is the Federal Reserve raising rates too aggressively. On March 16th, they started this process, and already we are seeing higher rates on variable interest instruments like credit cards and personal loans. This particularly hurts those who carry a high debt burden. Although it could be a positive for savers, who hopefully will see an increase in savings and money market rates (which have been dismal).
But the thing is, the Fed needs to raise rates if they want to get inflation back under control. Inflation has been at the top of our minds for a year now, and it is a real threat to the value of your money. (You can watch Will Hepburn talk more about this here). Raising rates could be a solution to keeping inflation under control. But like any tool, it can cause damage if used recklessly. So we’ll be closely watching how this plays out.
Beyond interest rates and inflation is the potential for an extreme escalation of the conflict between Russia and Ukraine. The danger here is Russa taking drastic measures that catch the world by surprise. I truly hope it doesn’t come to that.
Our Shadowridge Mid-Term Cycle signal is currently positive, but we are passing on new signals as long as the Long-Term Trend remains stubbornly negative, seeming to agree that “it ain’t over yet.”
As of Thursday night (March 24th, 2022), our Shadowridge Dashboard showed Positive to Negative sectors as 8 to 3. This has been the strongest reading we’ve seen all year. Financials, Consumer Staples, and Real Estate are the 3 hold-outs, but even they have signs they may improve soon. This short-term euphoria seems odd given the current gloominess of both international and domestic environments, so we are cautious in trusting it.
This month, let’s look at the year-to-date price movement of the 3 major Bond Indices – the Aggregate Bond Index (red), the 7-10 Year US Treasury Bond Index (blue), and the High Yield Bond Index (green). These diversifiers are normally used to offset the risk of the stock market. But so far this year, they have been having just as tough of a time as stocks. And it is possible this could continue in the face of rising interest rates: as interest rates rise, bond prices fall.
Bonds – the Aggregate Bond Index AGG is already -5.98% YTD in 2022 (see above chart). The 7-10yr Treasury bond index is -6.63% this year (StockCharts.com Data). We’re still leaning towards Floating Rate bonds as they are the only area still holding up.
Bottom line – we continue to be largely out of the market but have been adding back in some small allocations to the stock market in our more aggressive models. The big picture and long-term trends remain down, so that is a tough environment to get too aggressive long-term. As always, we prefer to play it safe when the markets are crazy.
Stay safe out there!!
Don’t forget to catch our monthly webinar, where I dive deeper into what I have mentioned in this newsletter commentary. For me, nothing tells the story as much as visuals, so I really enjoy the webinar for digging into what we’re doing with investment decisions. Will, Phil, and Laura will also be presenting timely topics to help you face life’s financial challenges and opportunities. We hope you can join us – Thursday, April 14th at noon Central time.
You can sign up for the webinar here. We look forward to seeing you there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.