Key Points:

• Concerns in the banking industry developed in March after the collapse of Silicon Valley and Signature Banks.
• The stock market was resilient, with the S&P500 gaining 3.67% despite Fed hiking interest rates an additional 25 basis points.
• High quality bonds gained during the month as yields fell.  Lower rated debt lagged as credit spreads widened on the prospect of worsening financial conditions.

After a dramatic rise in Treasury yields over the past 12 months from the Fed trying to rein in inflation, the banking sector was rattled with the failures of Silicon Valley and Signature Banks.  These collapses appear to be contained and do not seem to be part of a larger systemic issue in the financial system.  The Federal reserve stepped in to provide liquidity to all banks in an effort to calm depositors.  However, financial conditions are sure to tighten as liquidity becomes top priority to ensure that depositors are confident in the solvency of their banks.  Higher lending standards should raise borrowing costs for smaller and unprofitable companies.  This may help the Fed’s cause in reducing inflation from slower demand, but it also increases the likelihood, and perhaps magnitude, of an economic recession in the next few quarters.  Banking sector issues could cause businesses in all industries to pause hiring and business investment.  

Stocks were mixed during March as the selloff in financials (-9.6%) was offset by the run-up in technology (+10.9%) and telecom (+10.4%) stocks.  Utilities (+4.92%) and consumer staples (+4.23%) also gained as investors favored defensive equities.  Small cap stocks, which have a higher percentage of regional banks than large caps, fell 4.8% as measured by the Russell 2000.  The S&P 500 gained 3.67%, while the NASDAQ Composite was up 9.5%, benefitting from lower financials weight and declining Treasury yields.  Both international developed and emerging market stocks moved higher during March, despite additional banking issues abroad.  UBS bought Credit Suisse to avoid continued stress and uncertainty to the global financial system.  

Treasury yields fell in March as investors sought the safety in high quality bonds.  This drop in yields should help bank’s asset-liability mismatch, but the yield curve is still inverted which makes lending difficult.  While yields fell, the Fed raised their benchmark Fed Funds rate an additional 25 basis points, displaying their confidence in the system.  Overall, bonds traded higher in March with the Bloomberg US Aggregate Bond Index up 2.54%.  High yield bonds (lower credit quality) lagged the investment grade markets as credit spreads widened to reflect the additional risk.  Moving forward the Fed will likely be more data dependent in their decisions to raise interest rates further to bring down inflation, but the recent banking issues may slow the economy more than previously forecasted.

Sources: Morningstar Direct, Wall Street Journal, JPMorgan

Key Points:

• Higher than expected inflation data for January disappointed investors causing yields to rise.
• Stocks dropped in February after surging in January.  The S&P500 lost 2.44% in February but is up 3.69% for the year.
• High quality bonds sold off during the month with rising Treasury yields hurting existing bond prices.  

After a strong January in the markets investors hope for lower inflation (and less rate hikes) dwindled as inflation slowed less than expected.  Higher inflation raises the odds of recession as the Fed’s tightening cycle may be higher for longer.  Inflation should eventually come down but according to Invesco’s Global Market Strategist Brian Levitt, “..it takes roughly 12-18 months for tighter policy to be felt in the economy – and one year ago the Fed Funds Rate was 0.00%.” The economy appears relatively strong with consumers still spending and unemployment at just 3.4%, the lowest in 54 years.  The layoffs in big tech have been offset by strong employment gains in leisure and hospitality industries. Volatility will likely remain elevated for the next few quarters as investors monitor the economy and the likelihood of a recession.  The stock market is evaluating if it was accurately priced into last year’s market selloff.

The S&P 500 dropped 2.44% in February.  The tech-heavy NASDAQ Composite held up the best losing just 1.01% while the Dow Jones Industrial Average fell -3.94%.  Technology (+0.45%) was the only positive sector of the market while small caps performed better than large caps.  Growth outperformed value during the month as energy stocks were hit the hardest (-7.12%): weaker economies usually require less energy.  Developed international stocks dropped 2.09% while emerging markets fell 6.48%.  The tensions with China (balloons, Russian relations, etc.) saw the MSCI China index fall 10.37%.  The European equity markets were relatively flat as they enjoy dramatically lower natural gas prices amid a mild winter. 

Bonds sold off in February as yields moved higher.  The entire Treasury yield curve shifted up with inflation not falling at the pace that investors had hoped for.  As a result of the move in yields, the Barclays Aggregate Bond Index dropped 2.59%.  Inflation seems to have stabilized but remains far away from the Fed’s 2% target as personal spending remains strong.  This may be temporary as consumers spend down the last of their pandemic savings, but the Fed is intent on slowing the economy to stabilize prices.  The strong labor market has afforded them to be aggressive in raising interest rates.  If they can thread the needle and slow the economy just enough to avoid a recession, risk assets should rise in the coming quarters. 

Sources: Morningstar Direct, Wall Street Journal, First Trust, Merrill Lynch

Key Points:

• January was a “risk-on” month with both stocks and bonds starting 2023 strong.
• The US economy is expected to slow in 2023 as large corporations have begun to lay off their excess labor supply.
• International markets saw a strong month with the expectation of increased consumer spending as China comes out of lockdowns.

After a tumultuous 2022 where stocks and bonds lost double digits, 2023 opened with a bang in risk assets. On the hopes that the Federal Reserve will soon be done raising interest rates as inflation data is cooling, investors moved into risk assets in a big way.  The S&P500 gained 6.28% while the tech-heavy NASDAQ soared 10.67%.  The worst sectors of the 2022 market saw the biggest gains.  The communications services sector (+14.5%), which includes companies like Google, Facebook, and Disney was the worst sector of the S&P500 as it lost 39.9% last year.  Consumer discretionary stocks (Amazon, Tesla, Home Depot etc.) were the best performers of the month, snapping back from a 37% loss in 2022 to a 15% gain in January.  The market seems to be betting that inflation is under control and the looming economic recession may be mild or avoided.

Bond yields fell in January as investors prepare for the next several Federal Reserve meetings. The decrease in bond yields pushed the Bloomberg Barclays Aggregate Bond Index to return 3.08% during the month after falling 13% last year. Company layoffs have become a common headline as corporations prepare for a slowdown.  Leaner companies are a biproduct of the difficult periods of an economic cycle.  Higher unemployment rates typically accompany recessions, so the layoffs were not unexpected.  Cheap debt allowed corporations to spend in many areas as opposed to their best ideas. 

International markets gained around 8% during the month.  Mexican stocks were the best performer, up 17% on increased tourism.  As the Chinese economy begins to re-open, Merrill Lynch expects “revenge spending” where couped up citizens spend heavily on durable goods, travel and leisure. The ongoing conflict in the Ukraine should keep energy markets concerned, but the recent drop in energy prices has been a boost for consumers and businesses across the globe.

2023 will most likely be another volatile year in the stock market as the economy and spending slow.  Whether we end up in a recession is still up for debate, but the hope is that any correction is short-lived.  It is unclear if we have reached the bottom of the stock market just yet (stocks tend to turn around before the economy does).  Bonds could do well this year if the Fed gets inflation under control without further significant interest rate hikes and a deep recession is avoided.  Long-term investors should continue to focus on portfolio diversification.

Sources: Morningstar Direct, Wall Street Journal, First Trust, Merrill Lynch

Key Points:

• 2022 was a challenging year for investors as stocks and bonds fell in value.
• The US economy is slowing from rising yields as the Federal Reserve continues to target high inflation.
• Bond yields are the highest we have seen in years and if inflation gets under control, 2023 could be a more normal year for fixed income.

Investors didn’t have a whole lot to feel cheery about in 2022.  A war between the Ukraine and Russia scrambled energy markets, inflation hit a forty year high, and interest rates soared.  The delicate US economy wobbled during the year, as repercussions from supply chain disruptions continued to reverberate.  Both stocks and bonds had one of their worst years in decades after years of easy money abruptly ended as the Federal Reserve aggressively targeted rising prices. 

Among the major US indexes, the Dow Jones Industrial Average was the best performer with a 6.86% loss for the year. High quality companies with consistent earnings outperformed speculative growth stocks.  The S&P500 dropped 18.11% while the tech-heavy NASDAQ lost 32.54% after accounting for dividends.  Energy stocks were the darlings of 2022 gaining over 65% while most of the other major sectors fell.  Value stocks fared better than their growth counterparts, after several years of underperformance.  International stocks saw gains towards the end of the year as the strong dollar began to reverse course against most major currencies.  The Bloomberg US Aggregate Bond Index saw its worst year since it’s 1976 inception as it lost 13.01% amid rising yields.  Inflation has started to slow moving into 2023.  If it continues to drop, we could see a more normal year for the investment grade bond market.  Current yields are the most attractive we have seen in years.

Many economists expect the US to enter a recession this year as inflation and higher interest rates dampen economic activity.  However, the labor market is still tight, with unemployment at 3.7%.    Past recessions have seen much higher levels of unemployment, suggesting this recession may be mild and short lived.  A resolution to the conflict in Ukraine and a reduction in wage inflation could cause the US economy to avoid a recession but growth in the next several quarters will likely be below trend levels.  While the equity market may continue to be choppy heading into the new year, it is important to remember that stocks are a leading economic indicator and tend to bottom well before the economy starts to rebound.  Trying to time the market is a risky endeavor and best suited for short-term traders.  Long-term investors tend to be rewarded with patience and well-diversified portfolios.  Happy New Year!

Sources: Morningstar Direct, Wall Street Journal, JPMorgan, Morgan Stanley

Key Points:

• The Federal Reserve signaled that the pace of rate hikes may slow down in December, suggesting that inflation in the US may have peaked.
• Stocks and bonds rallied in November on the notion of smaller rate hikes, but the inflation fight will continue into 2023.
• International stocks had their best month in two years with both developed and emerging markets gaining double digits on a weaker US Dollar.

The Federal Reserve has signaled that it plans to raise interest rates an additional 50 basis points in December, after four consecutive 75 basis point rate hikes.  This suggests that they believe that inflation may have peaked and led to a risk-taking stance in November.  Stocks and bonds rallied on the news with the S&P500 gaining 5.59% for the month.  The investment grade bond market, which has suffered one of worst years in a generation, rallied on the Fed’s comments.  The Bloomberg US Aggregate Bond Index gained 3.68% for its best month of 2022.  Attractive yields and lower inflation expectations drew investor interest back into bonds, but a strong labor market may cause inflation to remain higher than the Fed’s 2% target into 2023 and perhaps beyond.

All sectors of the US stock market were higher in November.  Materials (+11.76%) stocks were the biggest gainers followed by industrials (+7.85%) and financials (+7.04%).  Consumer discretionary (+0.99) was the worst performing sector of the market as investors consider how deep and long a global recession next year might be.  US stocks seem to be getting thicker skin as they absorbed a billion-dollar crypto exchange that went bankrupt in a matter of days and civil unrest in China over strict COVID lockdowns.  Small cap stocks underperformed large caps and value stocks continued to dominate growth for the year.  As we head into the final month of 2022, the Dow Jones Industrial Average is down just 2.89%, the S&P500 index down 13.1%, while the tech-heavy NASDAQ has fallen 26.13%.

International stocks had their best monthly return since 2020 with the developed market MSCI EAFE Index gaining 11.26%.  Emerging markets (MSCI EM index) soared 14.83% after a very challenging year.  The US Dollar weakened against foreign currencies, boosting US investor returns in stocks abroad.  Asian stocks rallied on the hopes that China may soon relax its zero-COVID policy which has been hindering economic growth.  European stocks also rallied after an uncertain year of energy supplies. Lower global energy prices combined with declining yields in US bonds seemed to be a main contributor to the weaking US Dollar Index.

Sources: Morningstar Direct, Wall Street Journal, First Trust, Merrill Lynch