April 2022 - Market Update

Key Observations

Stocks in the US failed to maintain the rally off of the March lows, ending April down 13.8% from the highs last year. The S&P 500 fell 8.7% over the month of April while the tech heavy NASDAQ index fell over 13%. Bonds also fell in April as interest rates increased and credit spreads widened.

Inflation and the Fed’s response to it are the major storylines that will influence the forward path of the market. The Fed has given all indications that it intends to stay the course with 50bp increases to combat inflation, which continues to be exacerbated by supply side constraints from China’s lockdowns and the Russia-Ukraine conflict. Additionally, while an historically low unemployment rate might suggest a positive economic landscape, the labor shortage in the United States is also amplifying inflationary pressures by rapidly increasing labor costs.

Whether the Fed can achieve the balance needed to create the soft landing for the economy continues to be a question mark for the market. As Milton Friedman famously warned 60 years ago, the risk of turning the spigot too quickly is considerable. Monetary policy works with long and variable lags and the full effect of this Fed policy action is not likely to be felt until well into 2023. Overshooting rate increases can significantly impact economic growth and market participants are pricing in a greater probability of that happening heading into 2023.

Data Dashboard

Stock Market

Large-cap US stocks reversed course in April, after starting the month in rally-mode. Inflationary effects on consumers and business were a key component in Q1 earnings, and investors reevaluated their expectations for earnings growth if the US is in/enters a recession this year.

International stocks outperformed in April, with Emerging Markets benefiting from commodity prices. European countries may still be seen as riskier in the face of the Russia-Ukraine conflict, given the reliance on an array of exports from Russia.

The Consumer Staples sector was the one bright spot in US sector performance in April. The Communication Services sector with major holdings in Google and Meta (formally Facebook) as well as consumer discretionary (Amazon and Tesla) led the way down this month.

April Monthly Returns (by US Sector)

Data Source: Bloomberg. As of 4/30/2022

Bond Market

Broad bond indices, which typically provide some stability in volatile markets, are experiencing declines due to rapidly increasing rates. US aggregate bonds are down nearly 9% on the year while global bond indices are down more than 12%.

Treasury bond yields, the rates at which the US government can issue debt, continued their trend upward in April. Since the beginning of the year, 10-year yields have doubled to 3%. Shorter term treasuries are up even more. The 2-year Treasury yield is currently hovering around 2.8% vs. 0.73% on 12/31/21.

Borrowing rates for consumers are moving in tandem. According to Bankrate.com, the average 30-year fixed mortgage rate is 5.5%. We haven’t seen mortgage rates above 5% in over 10 years. That coupled with high home prices could impact affordability going forward.

Economics

The labor market remains extraordinarily tight. The number of job openings in March clocked in at 11.5 million, which is the highest level observed since the Bureau of Labor Statistics started tracking it 22 years ago. This measure suggests that there are significant labor shortages, which supports the notion that wages will continue to be squeezed higher to compete for a limited worker pool. This is precipitated by both strong demand for labor and a weak labor participation rate.

Inflation-linked bonds are currently pricing in 4.1% annual inflation for the next 2 years, implying that this current inflation spike should be temporary. The Fed’s changes to monetary policy are expected to cool some of the inflationary pressure at the risk of causing growth to slow enough to cause a recession. The effects are also lagged. The GDP measurement for Q1 was -1.4%, and the definition of “Recession” is two consecutive quarters of negative Real GDP.

Tactical Updates

Equity positions in our Tactical Portfolios gave back some of the gains from the previous month as we saw commodities, metals, and oil equities decline from their recent highs. We closed out of silver and energy MLPs while entering Australia equities and general US Energy Sector equities. Certain commodities have come off their highs but remain fairly attractive such as Brazil, Copper Miners, and Gold Miners. In addition to commodities and energy related equities we also have kept exposure to Utilities and Aerospace & Defense. Trading activity for the month was fairly low due to insignificant trend changes and lack of desirable alternatives.

We locked in short-term TIPS outperformance for our Fixed Income portfolios as we swapped for floating rates loans and ultra-short treasury bills as rates are expected to continue their increase.

General Client Considerations

Market volatility can cause anxiety and fear as you may see your portfolio values decrease and general volatility increase. It might be tempting to sell some of your positions and wait until the market cools off before getting back in. But before the temptation sets in, it’s important to remember that market downturns like this one were incorporated into your ongoing risk tolerance. It is not “part of the plan” to sell at these lows and lock in losses.

Thanks,

Ryan Wheeler

Chief Investment Officer

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