The Ugly, the Bad and the Good

With a tip of the hat to the classic Spaghetti Western and a reversal of the word order, I thought I’d share my thoughts about the volatility in the financial markets.

Ugly – Ugly well describes what we have seen so far this year from both stocks and bonds.  As I noted in my January 18 market update letter, long-term bonds and high valuation growth stocks are most vulnerable in a high inflation, rising interest rate environment.  Bonds have provided little solace as investors hoping to mitigate volatility in their retirement portfolios have endured one of the worst spans these past four months for bond performance in history.  Through Monday, May 9th, the Bloomberg U.S. Aggregate index is down 10%, a shocking result for investors accustomed to lower volatility from their bond holdings.  Recall that bond prices and yields have an inverse relationship.

Bad – While investors expect higher volatility with their stock holdings, growth stock returns have been bad, real bad.  The Russell 1000 Growth index is down nearly 25% through Monday putting it in bear market territory.  The tech-laden NASDAQ is down about the same amount, nearly 26%.

Good – Thankfully, value stocks have helped cushion the blow, with the Russell 1000 Value index having a relatively good (less bad) -8% return during this time.  Some non-traditional income generating assets have also helped investment portfolios, though the overall end result for balanced, diversified portfolios is still well in the red. 

So where do we go from here?  The major stock indexes were holding up fairly well through last week, clinging to their lows they hit earlier in the year.  Monday the 9th was another story, with stocks clearly breaking to new lows for the year.  While stocks certainly could continue their descent, the market action and dour sentiment the past few weeks are reminiscent of what can be seen near market bottoms.  The bleeding in bonds appears to have stopped with the yield on bonds hitting a level I expect it to have some difficulty breaking through.  Bond yields are at a level where they are about the most attractive they have gotten over the past 10 years.  While the odds of the Fed navigating a soft landing for our economy seem remote, the 10-year versus 3-month Treasury yield curve is very positive, implying no recession in sight.  The plunge in cryptocurrencies is encouraging as it indicates some of the speculative froth in the financial markets is being expelled.  Valuations in many segments of the financial markets are very attractive, and while this has no bearing on the near-term direction for stocks, it implies good value for patient long-term investors.  We may indeed be near a point where it is time to heed Warren Buffet’s famous advice, to be greedy when others are fearful.

Glenn S. Rank, CIMA®

Certified Investment Management Analyst®

President