Key Points:

• September was a difficult month in both bonds and stocks as investors came to grips with a “higher for longer” stance in yields.
• Energy was the only positive sector of the equity market as oil prices rose.
• Higher yields are being felt across the economy in the form of higher borrowing costs for consumers and businesses.

September lived up to its reputation as a notoriously bad month in the markets.  Stocks across the globe sold off after the Federal Reserve indicated that its outlook for rates was higher than expected.  There could be an additional rate hike in 2023 to make sure inflation is contained.  The S&P500 dropped 4.8% for the month with energy (+2.6%) the only sector in positive territory as oil prices climbed.  Real estate (-7.3%), technology (-6.9%) and consumer discretionary (-6%) stocks led the indices lower.  Small caps underperformed large caps and value stocks held up slightly better than growth.  For the year the Dow Jones Industrial Average is barely holding onto a 2.7% positive gain while the tech-heavy NASDAQ composite is still up over 27%.  The S&P 500 is up 13%.  Outside the US, developed and emerging markets fell for the month for US investors as the dollar gained against other major currencies.

Yields across the Treasury market increased on the expectation of a “higher for longer” stance for interest rates.  The 10-year Treasury Note yield climbed to over 4.6%, a level not seen since 2007.  The higher move in longer duration yields pushed the aggregate bond index into negative territory for the year.  The benchmark Bloomberg Aggregate Index fell 2.35% in September and is down 1.2% year to date.  Long-dated Treasuries and corporate bonds suffered losses while short dated Treasuries remained flat.  The Federal Reserve is still in its quantitative tightening mode and is a net seller of its mortgage and Treasury bonds it put on its balance sheet when it provided liquidity to the market during the COVID lockdowns.  It may need to re-visit that strategy if the selloff in bonds continues.

The US Government passed a very short-term spending bill to avoid a government shutdown, but the clock is still ticking and this time without a Speaker of the House.  The UAW strike poses its own set of challenges and could prove inflationary if car prices begin to rise after finally finding some equilibrium.  Manufacturing wages outside the auto industry could rise if the UAW gets the increases it is seeking.  The longer and deeper the strike, the more likely it is to cut into US GDP in the months ahead.

The Fed’s aggressive campaign to tackle inflation through interest rate hikes will continue to take time to see their effectiveness.  According to JPMorgan, “..investors are in an uncomfortable period of waiting to discover the impact of monetary tightening’s long and variable lags on the economy and markets.”  This uncertainty will likely continue to cause volatility in both stocks and bonds for the remainder of the year and into 2024. In times like these, investors tend to be best served by sticking to their asset allocations dictated by their well-constructed financial plans.

Sources: Morningstar Direct, Wall Street Journal, BEA.gov

Key Points:

• US Treasuries were downgraded by bond rating agency Fitch as the high debt burden continues to grow.
• Stocks saw their first decline after five consecutive months of gains with the S&P500 dropping 1.6%.
• Higher yields are being felt across the economy in the form of higher borrowing costs for consumers and businesses.

While investors continue to ponder if the US economy is headed into a recession, bond rating agency Fitch downgraded US Treasury debt in August.  They cited the high and growing government debt burden along with the debt limit standoffs in Congress leading to last minute deals.  This downgrade along with the increase in the level of government borrowing caused a dramatic rise in yields during August.  The 10-year Treasury yield climbed to 4.35%, its highest level since 2007.  Higher yields are putting pressure on the economy as the Fed tries to bring down inflation while not significantly slowing economic growth.  30-year mortgage rates are the highest in 20 years and seem to be keeping both buyers and sellers on the sidelines.

The increase in yields in the bond market hurt stock prices during the month as financing costs for both companies and consumers rose.  Stronger than expected economic data has sparked worries that the Fed may have to continue raising interest rates towards the end of the year.  The S&P500 fell 1.59% during the August after five consecutive months of positive gains.  The only sector of the market that was positive was energy, which gained 1.8% with the recent jump in oil prices.  Utilities (-6.2%) were the worst performers followed by consumer staples     (-3.6%).   These dividend paying sectors of the stock market tend to be bond proxies, so higher yields in bonds are more attractive. Small caps fell 5% while international developed (-3.8%) and emerging markets (-6.2%) sold off on worries on the Chinese economy.

The message from the Federal Reserve after the Jackson Hole meeting was that they still want to get inflation under control and will be data dependent on future policy decisions.  Investors need to get used to the notion that rates will likely be higher for longer if the economy remains strong.  Bonds lost 0.64% for the month (higher yields equals lower bond prices) as measured by the Bloomberg Aggregate Bond Index.  However, bonds are still positive for the year and are paying attractive coupons that are finally higher than inflation.  Stocks may have gotten ahead of themselves to start the year in the hopes that the US would avoid a recession.  Coming into the final months of 2023 the market may remain a bit choppy as we see if the Fed can orchestrate a soft landing for the economy.

Sources: Morningstar Direct, Wall Street Journal, BEA.gov

Key Points:

• The US economy grew 2.4% (annualized) in the second quarter of this year despite fears of a slowdown.
• Stocks continued to outperform bonds with the S&P500 advancing 3.21% in July.
• The Federal Reserve raised their benchmark rate an additional quarter point as inflation remains above their target.

The economic environment turned more favorable in July as economic growth proved resilient and inflation continued to fall.  The US economy grew at an unexpected 2.4% annualized rate in the second quarter, marking the fourth consecutive quarter of over 2% growth. The prospects of a soft landing for the economy grew as recession fears faded.  Business investment surged 7.7% in the second quarter as onshoring and automation picked up pace.  As a result of the positive economic conditions, risk assets continued their march higher for the year with stocks significantly outperforming bonds.  

The S&P500 gained 3.21% in July pushing its year-to-date total return to 20.65%.  The risk-on sentiment was clear in small cap stocks as the Russell 2000 gained 6.12% for the month.  There was more breadth to the market rally in July as opposed to the top stocks moving the indices higher as seen in previous months.  Energy stocks (+7.4%) were the best performing sector as stronger economies demand more energy.  Communication services (+6.9%) and financials (4.9%) also saw strong returns.  

Inflation continued to ease from 2022 highs as the Consumer Price Index rose just 3% in June from a year earlier.  Despite the drop, the Fed Reserve increased the Federal Funds rate an additional 25 basis points in July in an effort to get inflation to its 2% target.  The market expects another small increase this year, but the heavy lifting appears to be over.  The main concern for the Fed seems to be wage inflation which is a biproduct of a strong and tight labor market. 

The bond market was relatively flat in July with a dip in treasury prices.  High yield bonds performed best amid the risk-on sentiment.  For the year the Bloomberg US Aggregate Bond Index has gained 2.02%.  Short maturity treasury yields are higher than those with a longer duration.  This inversion in the yield curve typically precedes a recession as investors expect lower rates in the future.  The mild recession that has been expected for quite some time may not come to pass.

Sources: Morningstar Direct, Wall Street Journal, BEA.gov

Key Points:

• The Federal Reserve paused its aggressive rate hiking campaign in June.
• Stocks moved higher in the first half of 2023, but investors are still cautious on the economy.
• Treasury yields are higher than they started the year while the yield curve remains inverted.

After a streak of 10 straight interest rate hikes the Federal Reserve decided on a “hawkish pause” for June.  While they did not raise rates this meeting, they indicated that they may continue to hike in the coming months.  Inflation has fallen to 4% from its 9.1% peak last June, but higher rates may be necessary to achieve the Fed’s 2% inflation target.  The strong labor market and unwavering consumer spending is propelling the economy ahead despite expectations of an economic slowdown.  The long-anticipated recession continues to be a few quarters away.

Stocks marched higher in the first half of this year.  The NASDAQ Composite has been the clear winner gaining 32%, followed by the S&P500 (+17%) and the Dow Jones Industrial Average (+5%). Technology (+43%) and Communication Services (+36%) stocks have propelled the NASDAQ higher, while heavier weights toward “old economy” sectors like Energy (-6%), Utilities (-6%) and Financials (-1%) weighed on the more balanced indices.  Small caps have lagged larger stocks as tighter credit conditions from troubles in the banking sector and higher rates may lead to less access to capital for smaller borrowers.  Both growth and value stocks performed well in June but for the first six months, growth has been the clear winner.

International equities moved higher this year with the MSCI EAFE Index gaining 12% for US investors.  Emerging markets have lagged developed markets as escalating political tensions with China are weighing on investor confidence.  Latin American stocks are up 19% as American companies increasing production in Mexico have sparked investor optimism.  

The bond market has somewhat stabilized now that debt ceiling concerns and high inflation have abated.  The Bloomberg Aggregate Bond Index gained 2% for the year with Treasury yields across all maturities higher than the start of the year. Yields across the curve are at multi-year highs but the Treasury yield curve remains inverted: shorter maturity yields are higher than longer dated bonds.  This happens when the bond market expects the Fed to cut rates in the future to provide liquidity or stimulate the economy if we see a recession.  We may not see that until 2024.

Sources: Morningstar Direct, Wall Street Journal, BEA.gov

Clearview Portfolio Consulting May Market Recap

Key Points:

• The US Government avoided a default on its bonds as the debt ceiling was raised in a sigh of relief to investors.
• Stocks moved higher in May and are having a strong year but the increase in gains has been narrow in scope.
• The bond market saw yields rise as nervous investors sought the safety of cash.

The global economy avoided a catastrophic debt default by the US Government as both parties of Congress agreed to an increase to the debt ceiling with cuts in federal spending.  The risk of default has been removed from investor concerns, but elevated inflation, tight credit conditions and a slowing economy are still present.  The threat of a recession in the back half of this year still looms, but US investors continue to look beyond the current issues.  The S&P500 advanced in May, gaining 0.43%.  Year to date the index is up 9.65% but the sectors in positive territory have been rather narrow.  Technology (+33.95%), communications services (+32.81%) and consumer discretionary (+18.73%) are the only sectors positive for the year.  The equally weighted S&P500 (where every stock gets the same weight) is down 0.63% year to date.

This narrow set of stocks that is moving the market higher can be attributable to some mean reversion, as these were the worst sectors of 2022.  However, the top 7 stocks of the S&P500 are all up over 30% for the year, while more than half of the stocks in the index are down.  Investors have flocked back to tech names as the interest in artificial intelligence companies has exploded.  People across the globe are experimenting in ChatGPT and weighing the possibilities (good and bad) for the technology. 

International stocks fell in May with a combination of a strengthening US Dollar and high inflation weighing on consumer spending abroad.  Chinese stocks dropped 8.4% for the month as global economic slowdown is weighing on manufacturing.  The opening of the Chinese economy after severe lockdowns has lost steam and slower growth rates are now being priced into investments.

The US bond market saw yields climb in May as investors moved away from those Treasury securities most vulnerable to a missed payment in the event of a default.  As a result, the Bloomberg US Aggregate bond index dropped 1.09% during the month but still has a 2.46% gain for the year.  Attractive yields on short-term debt have lured investors to money market mutual funds.  According to the Investment Company Institute (ICI) money market assets hit an all-time high of $5.4 trillion.  With the debt ceiling fight out of the way and inflation continuing to head lower, the bond market may begin to stabilize after a volatile 18 months.

Sources: Morningstar Direct, Wall Street Journal, BEA.gov

Key Points:

• Slower economic growth in the first quarter of this year was expected but came in softer than economists predicted.
• Global stocks moved higher despite issues in the banking sector.
• Bonds had a good start to the year after a challenging 2022.

The US economy is slowing down in one of the most widely anticipated recessions of modern times.  GDP (a measure of economic activity) increased at an annualized rate of 1.1% in the first quarter, which was a slowdown from the 2.6% gain in Q4 of 2023.  Economists expect economic growth to continue to fall as higher inflation and corresponding higher interest rates have caused business investment to decrease and consumer spending to flatten.  While US inflation has come down from the highs of 2022, it is still above the Fed’s 2% target and could cause additional increases in policy rates.  The dramatic rise in interest rates over the past year has resulted in a few bank failures, with First Republic the latest bank being seized by regulators after losing $100B in deposits.

Stocks moved higher during April with the S&P500 gaining 1.56% despite the aforementioned headwinds.  Communications Services (+3.77%) was the best performing sector with strong gains from Meta (Facebook) and Comcast.  Financials posted a strong 3.18% return, suggesting some stability in the banking sector. Industrial stocks were the worst performer for the month, losing 1.18% with UPS and John Deere selling off in anticipation of an economic slowdown.  The Dow Jones Industrial Average gained 2.57% while the NASDAQ Composite was flat for the month.

Treasury yields have fallen since the start of the year as the Fed should be close to the end of their tightening cycle.  The Bloomberg US Aggregate Bond Index has gained 3.59% in 2023 after a difficult 2022.  The focus in the bond market is now on the debt ceiling and how long the government can continue to service its debt. Leaders in Congress need to reach a compromise on spending and debt limits with the clock ticking.  Past negotiations have come down to the wire so this time it may be no different.

International developed markets are having a good start to 2023 with the MSCI EAFE Index gaining 11.53%.  European markets survived the winter without Russian energy supplies of years past.  Liquified natural gas imports from the US and other major producers allowed the European economy to survive the winter without energy rationing.  A strengthening Euro relative to the US Dollar has made these markets more attractive to US investors. Asian markets have lagged both US and Europe with the Chinese economy slowly opening.

Sources: Morningstar Direct, Wall Street Journal, BEA.gov

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