Market Volatility continues. While the second half of March started to look like the stock market environment was improving, April came in and immediately changed that back to negative. And for most of the month, the major stock (and surprisingly the bond) markets have really struggled.
It has now been one year since the Federal Reserve said Inflation was “Transitory.” How is that working out for them? Currently, the United States is experiencing the highest inflation rate of all developed countries (Bloomberg Data). But this doesn’t come as much of a surprise to us, as we’ve seen the cracks forming in the economy for this same amount of time. And now, the stock markets are finally acting more in line with our expectations.
Going forward, there is a wide range of opinions as to just how much and how fast the Federal Reserve will raise rates in the next few months to the next year. There are some who believe that the Fed will do just enough to not let the stock market fall (as has often been the case in the past). And there are those who believe the Fed needs to create hard times for the stock market to help get inflation under control. But we can’t have it both ways, so the Fed looks really stuck here and we are very curious as to which path they choose to go down.
And let’s not forget that Russia and Ukraine are still at war (somehow the markets have seemed to ignore this of late).
Our Shadowridge Mid-Term Cycle signal and Long-Term Trend signals have both been negative all month. And while these both remain negative, we are (and have been) holding a good amount of our strategies in cash. The equities that we do own are lower risk or hedged to further lower market exposure. We’re looking at the possibility that it may remain that way for a while.
As of Thursday night (April 28th, 2022), our Shadowridge Dashboard showed Positive to Negative sectors as 1 to 10. That’s not a great reading for the market and we’ve been watching that number steadily decline over the entire month.
This month, I want to revisit the NYSE New Highs-New Lows chart. What has been fascinating to watch is that on days that we get big rebounds in the market, often we see more new lows than highs being hit (Thursday, April 28th for example). On that day, the S&P was up nearly 2.5% while new lows were beating new highs by -501. For context, a normal number is closer to 100 or 150 in either direction. To us, that means more storms on the horizon, and we remain well prepared for those storms.
Bonds – the Aggregate Bond Index AGG is already -8.88% YTD in 2022. The 7-10yr Treasury bond index is -9.85% this year (StockCharts.com Data). Wow, the bond market is looking uglier than it has in decades and this is before we have seen a signification rise in interest rates! (As a general rule – when interest rates rise, the price of bonds fall). Ordinary advisors who allocate the “safe” money to bonds are getting the shock of their lives right now, with worse yet to come. Thankfully that’s not us.
Bottom line – we continue to be largely out of the market, and what few buy signals we saw in our more aggressive models were short lived and now are back out of the market. 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, May 12th at noon Central time.
You can sign up for the webinar here. We look forward to seeing you there!
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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.