May Newsletter to Clients

Enjoy this month’s edition that features a review of stock and bond markets so far this year.

To paraphrase the title of a well-known children’s book, this newsletter could very well be titled, The Stock and Bond Markets and their Terrible, Horrible, No Good, Very Bad Start to the Year. How bad, you say? Here are the benchmarks:

The S&P 500 index of large, U.S. company stocks was down almost 13% through the end of April;

The Russell 2000 index of small, U.S. company stocks was down almost 17%;

The tech index NASDAQ was down a whopping 21%;

Even the bond index was down 9.5% through that same period.

So, historically what happens next after drops like this?

Among the four-month periods since 1992 when the S&P 500 dropped 10% or more, the index has gained a median 2.6% during the next six months;

There have been 24 corrections – a drop of 10% or more – since WW II:

The average correction was 14.3% and lasted 133 days;

Our current correction is at 114 days as of the first of the month.

What will happen the rest of 2022? Despite the many talking heads’ prognostications, no one knows…no one. Here is what we do know – the Federal Reserve will raise short-term interest rates to help calm inflation. Typically, when interest rates rise it can hurt a portion of the stock market. High growth companies, for instance, can feel the most pain as they tend to borrow money to help fuel their growth. So far this year the leaders of the S&P 500 have performed poorly:

Amazon stock price is down over 29%;

Microsoft is down over 16%;

Facebook, now Meta, is down over 38%;

Alphabet, the parent of Google, is down over 20%.

It may be counterintuitive, but rising interest rates also hurt bonds as their prices fall when interest rates rise. Short explanation: people will pay less for a bond with an interest rate of 3%, for instance, than they’ll pay for a new bond sold at an interest rate of 4%. So, as interest rates have risen this year, the values of outstanding bonds and mutual funds that hold bonds have declined in value. The good news is bond mutual funds can purchase new bonds at higher interest rates and that will increase the yield that fund produces for us, their investors. For instance, the Lord Abbett Short Duration Income Fund (LALDX and LLDYX) that many of us own, turns over 13% of its portfolio every three months. As some bonds mature, they can now purchase new bonds with higher yields that produce more income for its investors.

Based on stock valuations it is possible that international stocks could do well over the next decade. The U.S. is 62% of the total value of the world’s stock markets, but our economy is only 26% of the global economy. Conversely, emerging markets stock markets’ value is just 11% of the world’s total, while its economic size is about 35%. That could suggest international stocks are worth less than their U.S. counterparts and are poised for growth in years to come.

While we can’t predict, yet control, the stock and bond markets, we can help limit our risk and find opportunities by diversifying our portfolios with varying investment types: large and small U.S. stocks, bonds, real estate, and international stocks are all parts of clients’ portfolios.

If the market has you concerned, please schedule a meeting with us to talk about your individual circumstances.

 Thank you for your continuing confidence.