Stocks Rise, Bonds Falter as Fed Shows Talons

After last week’s relief rally produced the best run of returns since November 2020, stocks were all over the map in anticipation of, then relief over, then fear of the Federal Reserve’s interest-rate policy. Fed Chair Jerome Powell’s hawkish remarks Monday afternoon sent indexes sliding again, leaving some to fret that policymakers are being too hasty by half.

A seesaw pattern continued throughout the week, as mixed news sent traders veering from gloom to boom and back again.

Supply chain snarls, exacerbated by the war in Ukraine and warnings of future shortages in key commodities, bolstered recession fears. But the announcement of a U.S.-EU energy pact helped steady oil prices for now. Meanwhile, strong corporate earnings and the slimmest initial jobless claims since 1969 (a reflection of the tight labor market) painted a picture of an economy in growth mode despite geopolitical turmoil.

Arguably, there’s been more heat than light in the stock market lately. Or to put that into investment parlance, we’re experiencing ongoing and abnormally high volatility. On average, the S&P 500 has historically moved by just 0.7% up or down on a day-to-day basis. This month, the S&P has moved that much or more on 14 out of 18 trading days. We’ve seen a 3.0% drop on one day and three days when stocks rose more than 2%. That’s a lot of commotion for a 3.5% gain for the month through Thursday.

The inevitable return of volatility to the market was an issue we raised repeatedly last year, so we’ve been ready for the ride. Even if the rollercoaster of the past few weeks has more twists and turns coming, our belief that time in the markets, not market timing, generates the best long-term returns remains unshaken.

Has the Bond Market Lost Its Mojo?

When the Fed finally announced its transparently telegraphed 0.25% interest-rate hike last week, traders seemed to take it in stride. But when Fed Chair Powell subsequently said the next hike could be a chunkier 0.5%—and that it could be the start of a longer series of upward moves—markets stumbled.

A 50-basis-point interest-rate hike is, of course, double what the Fed hinted at earlier this month. But is it radical or even especially unexpected? Not really. Judging by the fractional losses stocks sustained on Monday following Powell’s comments, and their relative resilience since, we’d say traders may be relieved that the Fed is finally taking inflation seriously.

Bond traders, on the other hand, were just plain spooked by the prospect of a more hawkish Fed. Vanguard’s Total Bond Market Index fund fell 0.9% on Monday—that’s the 25th largest one-day drop for the fund since its 1986 inception. (March has also seen two other one-day losses that rank among the fund’s 25 worst, which is one reason it has chalked up a 2.8% decline so far this month.)

Those are ugly numbers for a bond fund, an asset class most people rely on to provide ballast when stocks are stormy. But they’re also the product of just a few days’ trading. Remember, declines in the bond market are rare, but they’re not unheard of. Looking back over the past 40-plus years of rolling 12-month returns, the bond market has lost money about 10% of the time, or about 20% of the time if you look at three-month rolling returns.

Over rolling three-month periods, stocks and bonds have both had negative returns 8% of the time—not a common occurrence, but also not surprising to see. What’s incredibly rare, however, is for both asset classes to be in simultaneous decline over longer stretches. Looking back over rolling six-month time periods, both stocks and bonds were down in sync only 3% of the time. Extend your time to a year and it’s less than 1%—only twice out of 540 periods.

In short, bonds can still do their job by balancing risk in a diversified portfolio.

Moreover, patient investors may be able to weather dips and recover value by holding bonds longer: While the price of a bond fund tends to decline as rates rise, bonds within the fund will pay out at par if they’re held to maturity, gradually recouping the loss the longer they’re held. Bond funds and ETFs can reinvest interest earned from maturing bonds into newer, higher-yielding securities, creating a “self-healing” dynamic in which prices return to par even though yields are rising.

This means that as long as your time horizon is longer than a few months (that is, as long as you’re an investor, not a trader), there’s a good chance that your portfolio will be producing positive returns even when bonds go through a rough patch.

For much more on what interest-rate hikes mean for your portfolio, click here to read our special report on the topic.

Chart of the Week: The Reality of Wartime Returns

We monitor a wide range of data to form our outlook on the market and the broader economy—every week, we’ll spotlight one indicator our analysts have found informative.

By Director of Research Jeff DeMaso 

A month ago, Russia invaded Ukraine; surely stocks are down and bonds are up since then, right? Not quite.

This week’s chart plots the returns of a few major markets as measured by Vanguard’s index funds.

Going region by region for stocks: European equities fell the hardest at first—no surprise there—but after tumbling 11.9% in the first two weeks, they had nearly recouped all of their losses as of Wednesday night. The U.S. has been the best-performing region, with Vanguard’s Total Stock Market Index fund up 5.6% since the Russian invasion. Emerging markets are down the most. After falling into correction territory (down 12.3%), Vanguard’s Emerging Markets Stock Index fund has rebounded and is only 4.5% below its prewar level—a loss is a loss, but that’s not a bear market or a crash.

As for bonds, let’s look at U.S. Treasurys—historically the safe-haven asset of choice that you might expect investors to flock to after a war breaks out. Well, Vanguard’s Intermediate-Term Treasury Index fund is off 2.1% since the invasion began.

Two lessons from this chart: First, the market impact of most geopolitical events isn’t as severe or as long-lasting as you might expect. Second, timing the market based on macro events is difficult—if not impossible.

Financial Planning Friday
Streamlining Your Finances

From your first checking account to your current 401(k) plan, by the time you reach your 50s, you may have opened accounts with numerous financial institutions. But if you are like most people, you may not have closed nearly as many. Streamlining can help improve your investment returns, reduce fees and, most importantly, give you a clearer picture of your financial situation heading into retirement.

Here are five ways to simplify your financial life:

1. Use fewer custodians. When we begin the financial planning process with our clients, we consider it a red flag to see an excessive number of statements from a plethora of firms. Trying to maintain a cohesive portfolio strategy with multiple points of contact is sure to create confusion. The best fix is to decrease the number of accounts you manage, making it easier to grasp the overall state of your finances and remain on track with your goals. This will be even simpler if you can consolidate with a single custodian you trust. 
2. Reduce excess cash. An emergency fund is the foundation of your financial plan. We recommend keeping enough cash to cover three to six months of expenses. But after years of asset accumulation, you may find that you have more cash on hand than you need, scattered among multiple accounts. Consider reinvesting that extra cash to avoid missing out on years of compound growth.
3. Consolidate retirement savings. Odds are you haven’t spent your entire career with one employer—meaning you may have retirement funds stashed in several 401(k) or retirement accounts. Leaving funds to languish in forgotten accounts often means they’re part of a stale investment strategy that’s no longer suitable for your goals. In some cases, rolling the funds into an IRA might lower your costs and improve your returns; in others, it may be preferable to consolidate into one 401(k).
4. Put your estate in order. Having accounts that are streamlined, with beneficiaries listed, will help ensure that your assets pass to heirs in accordance with your wishes. It will also make it easier for your beneficiaries to settle your estate. 
5. Prepare to take RMDs. Under current law, required minimum distributions (RMDs) from your retirement accounts begin at age 72. Consolidating your retirement accounts where possible will make RMD management easier, helping you avoid tax penalties.

If you would like to explore consolidation opportunities, please contact your wealth management team. We are ready to assist with these ideas and many more.

Podcast: Panic Selling and Relief Rallies—Our Experts Weigh In

The past several weeks have been some of the most volatile in history for both stocks and bonds, with war, inflation and a new COVID-19 crackdown in China just a few of the crises causing tumult for investors. In this episode of The Adviser You Can Talk To Podcast, Portfolio Manager Steve Johnson asks our market experts about the indicators we’re watching and the moves we’re making in response. Topics include:

• Why it’s worth investing abroad despite the geopolitical instability
• Whether the Fed can walk the line of taming inflation without spurring recession
• How a systematic approach to trading can help investors navigate volatility
• What bargains may exist today for risk-tolerant investors

No one with money in the market has come out of the past several weeks without a few more gray hairs. Let our experts provide clarity with some rational thinking and smart advice. Click here to listen now!

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Adviser Investments in the Media

This week, Portfolio Manager Adam Johnson spoke to Fox Business about the Ukraine war’s impact on the markets—or lack thereof. Chief Investment Officer Jim Lowell appeared in Barron’s to remark on Ned Johnson’s legacy at Fidelity following his passing.  

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed China’s equity outlook, while Portfolio Manager Steve Johnson offered his thoughts on the flurry of activity in the options markets this week.

Looking Ahead

Next week, we’ll see a slew of reports, with fresh updates on home prices, manufacturing, consumer confidence, corporate profits, inflation, personal incomes and employment.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.