April was a rough month in markets, as both stocks and bonds were down in tandem. US markets were the most difficult, but foreign markets were not much better. The selling pressure has persisted into May. Through April, it has been the worst start to the year for the S&P 500 since 1939.
What happened? Interest rates have risen, the dollar has strengthened, volatility has gone higher, and asset prices have reset lower. The era of ultra-accommodative monetary policy appears to be over. A period of adjustment seems to be in order as it takes time for market participants to digest a new regime and for markets to find a new equilibrium. While this period is uncomfortable in the short-term, it is probably healthy for markets and the economy in the long-term. It is worth noting that for the US, the longer-term picture still looks pretty good.
As we have gotten through earnings season, there’s been a tone of uncertainty from several corporations on the near-term demand outlook and a renewed focus on streamlining costs. We think less easy money and some belt tightening in corporate America could help quell overly robust demand for goods and labor. As the economy evolves, we would also expect this to help on the inflation front.
During this time, we have tried to be as proactive as possible in reaching out to and speaking with clients. A common question we have gotten is how and when we expect things to settle out. When exactly, we do not know. We do see some signs that the bond market may be stabilizing. We think bond market volatility settling down is a pre-requisite for the equity market volatility to recede, however the length of time between those two events is unknown. We observe that things can change quickly and in unpredictable ways. We believe that attempting to time it increases uncertainty and introduces execution risk. It is our view that the right investment strategy is the one an investor can stick with through both good and bad markets. That said, if the recent volatility has caused you to rethink the level of risk you are taking, we would welcome a conversation.
