Tomorrow the Federal Reserve meets and is expected to boost its federal funds target rate by 50 basis points…up to a target of 1%. Now for the ‘old’ people like me, that is an incredibly low rate, but today’s computers are not programed with that historical perspective. Frankly, they have no perspective at all.
Because of that lack of, let’s call it insight?, the market has reacted and started 2022 off on really poor footing. Its not just the stock market but the bond market has reacted to Washington policies, supply chain constraints and massive inflation numbers ( we have the highest inflation in 40 years), by moving up over 2% ( as gauged by the ten-year treasury yield) in just 18 months. Energy prices have surged from $35 a barrel in January of 2021 to over $100 today. The media gets excited by events like this…never let a good crisis go to waste is their mantra. And the computers could care less they just see the percentage changes in their programming.
In the Stock Market
The S&P 500 Index (“index”) closed April 2022 at 4,131.93, 13.86% below its all-time closing high of 4,796.56 on 1/3/22, according to Bloomberg. The S&P MidCap 400 and S&P SmallCap 600 Indices stood 14.10% and 17.14%, respectively, below their record closing highs as of month-end. All three major stock indices are in correction territory. A correction is usually defined as a 10.00% to 19.99% decline in the price of a security or index from its most recent peak. Keep in mind, prior to 2020, there were 26 market corrections since World War II, as measured by the S&P 500 Index, with an average decline of 13.7%, according to Goldman Sachs and CNBC. The average recovery period was approximately four months. In April 2022, the S&P 500 Index posted a total return of -8.72%. Only one of the 11 major sectors that comprise the index was up on a total return basis. The top-performer was Consumer Staples, up 2.56%, while the worst showing came from Communication Services, down 15.62%. The index posted a total return of -12.92% year-to-date through 4/29/22. This is the worst start to a calendar year for the index at this point since World War II, according to CFRA Research chief investment strategist Sam Stovall. Three of the 11 major sectors were up on a total return basis. The index’s top performer was Energy, up 36.85%, while the worst showing came from Communication Services, down 25.68%. One potential silver lining in the current climate is that many of our largest corporations are holding a lot of cash. In Q4'21, S&P 500 Industrials (Old) cash and equivalents stood at $1.80 trillion. The all-time high was $1.89 trillion, set in Q4'20. This figure excludes cash held by Financials, Utilities, and Transportation companies. That is a lot of dry powder that could potentially reward shareholders with stock buybacks and dividend payouts moving forward.
The yield on the benchmark 10-year Treasury note (T-note) closed trading on 4/29/22 at 2.94%, up 60 basis points (bps) from its 2.34% close on 3/31/22, according to Bloomberg. The 2.94% yield stood 90 bps above its 2.04% average for the 10-year period ended 4/29/22. As indicated in the table (Bloomberg Fixed Income Indices), bond returns are down markedly across the board this year. In fact, global bonds just posted one of their worst months ever, due largely to rising interest rates and bond yields, according to Bloomberg. The Bloomberg Global-Aggregate Total Return Index of investment-grade debt (not in table) declined 5.48% on a total return basis in April, one of the largest monthly declines since the index's inception in 1990. Bond yields are starting to normalize worldwide. As of 4/25/22, all of the outstanding investment-grade corporate debt yielded 0% or higher. No more negative-yielding corporate debt. Some negative-yielding government debt remains but it is relatively small. The Bloomberg Global Aggregate Negative Yielding Debt Index declined from $11.31 trillion on 12/31/21 to $2.78 trillion (all government bonds) as of 4/29/22. The index’s all-time high was $18.38 trillion on 12/11/20. Despite inflicting some significant short-term pain on fixed income investors, the normalization of interest rates and bond yields are a long-term positive, especially when you factor in the damage high inflation can cause, I hope….
In short the Fed is moving to try and squelch inflation while not destroying the economy and Wall Street does not seem to believe that they can do it while fighting our politicians desire to spend more than they make. The markets’ reactions to date are showing us this uncertainty and investors will be interested to hear the Feds guidance for their next meetings...to see how high and how fast they will attempt to push interest rates to beat inflation…oh, and by the way, they are doing this while the economy is already slowing as evidenced by last week’s GDP number that showed the first contractions since the COVID lock downs. Yes, in a period where Washington is trying to float another COVID relief bill and the Fed is trying to undue the impact of those extra dollars in the system we also may be entering a ‘technical’ recession…oh boy..tomorrow will be interesting.
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