Never Ending Volatility
Recently, we’ve been getting questions from clients regarding what seems like never-ending volatility in the market. Because of this, we wanted to share a chart with you, which you can see in the video for this episode, that shows fourteen of the past fifteen calendar years. From 2008 to 2022, the S&P 500 index endured no less than two negative total return months and as many as eight negative months in 2008. From 2008 through February 2023, the S&P 500 index endured a loss in 61 of the 182 months. The unique year was 2017, when at least one negative month didn’t occur. This data is important because even with the volatility seen since 2008, the S&P 500 has an annualized total return of 8.95%. Historically, volatility is the norm, and given the recent news around the banking sector and stubbornly high inflation, we could easily see further volatility. That said, stock prices don’t rise in a straight line, and investors will encounter turbulent times along the way.
Long Term Impact
All eyes were on the Fed Wednesday as they announced their decision to increase interest rates by 0.25 percentage points. As we discussed in our episode last week, this was widely expected. A few weeks ago, market participants expected a 0.50 percentage point hike. However, with the news about the banking sector, many expected that the Fed would pause rate hikes. Some participants believe that if the Fed had paused rate hikes, it would have been good for stocks, bonds, and the banking sector. So, why didn’t they pause, and what are they looking at that the rest of the market isn’t? The Fed appears to be more focused on inflation and avoiding stop-and-go monetary policy. They want to avoid this because that was the policy of the 1970s when inflation was rampant for almost a decade. On a chart shown in the video for this episode, you will see a blue line showing today’s Consumer Price Index and a red line showing the Consumer Price Index in the 1970s. These lines show that we are kind of tracking with the early seventies. The Fed doesn’t want to let up on inflation and allow it to go back up. If that happens, we’ll be fighting the same battle a few years down the road, and that is the risk of stop-and-go. It would be positive in the short term but harmful in the long term. The Fed is between a good rock and a hard place, being too aggressive and hurting the economy and the bank sector or too soft, allowing for a 1970-style multi-year inflation fight. On another chart in the video for this episode, you can see where the Fed Funds Rate currently sits. We are just now getting to the higher-end area where that was needed back in the late seventies and early eighties to finally beat inflation. There is a lot for the Fed to digest in the short term, and even though the markets might want the Fed to pause interest rate hikes, there’s a lot of risk in the long run. The long-term impact is likely what Chairman Powell is looking at. We will keep an eye on this moving forward.
Stocks and Bonds
A chart in this episode shows the correlation between the Nasdaq 100, the 100 biggest tech stocks, and the 10-year treasury. If stocks and bonds are directly correlated, they are closer to +1 and moving in the same direction. When they are closer to -1, they are inversely correlated and move in the opposite direction, which is more typical for stocks and bonds and what we like to see. As you see in the chart shown in the video for this episode, for much of 2022, stocks and bonds were directly correlated. While being correlated is excellent when the market is moving up, it is not good when it is moving down, like last year. Since stocks are down, people are asking how their fixed income is doing, but unfortunately, that also took a hit in 2022. Things change, and the norm is that stocks and bonds will be inversely correlated and working oppositely. Since SVB Bank announced its capital raise on March 8th, stock prices and bond yields have decreased, while bond prices have increased. In short, bond prices go up when stock prices go down, which is more typical in the market and something we like to see. We believe diversification is important and is great when working properly. Last year, stocks and bonds were both down, so seeing the market return to normal and hopefully sustain it for the long term is excellent.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates and bonds are subject to availability and change in price.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss. Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.