Listen to the podcast below to hear Jill talk about
- Stock and bond markets
May 17, 2022
Listen to the podcast below to hear Jill talk about
As many of you know, I received a new left hip at the end of April. I went home the same day as my surgery but I think it was because I got started so early – surgery was at 7:15 AM.
Two weeks later, I stopped in at the office for about 90 minutes. I’m still building up my stamina but it was nice to be out and about after staying at home. Even before outpatient physical therapy, I’m pleased to say I walk like a regular person even though I am supposed to stay on a cane. No more stiff walking or compensating on the other hip. Anyway, amazing what they can do today. Thank you for your flowers and well wishes.
I’d like to start with a discussion on the stock and bond markets. As we’ve mentioned in previous communications, the large technology component in the S&P 500 was responsible for much of the recent gains. According to Bloomberg, as of August 2021, about 23% of the S&P 500 was made up of five stocks; Facebook (now Meta Platforms), Amazon, Alphabet (formerly Google), Netflix, and Apple.
While they were the major contributors to the rise in the S&P 500, the reverse also holds true. Year-to-date as of May 11th:
Meta Platforms (formerly Facebook) is down 44%
The S&P 500 is down 17% over the same period.
The U.S. Core Aggregate bond market is down 9% for the year.
Normally, bonds don’t fall at a similar pace to stocks which is why they are considered a cushion during stock declines. However, according the Wall Street Journal article “Investors Dilemma, Stock and Bonds Fall in Tandem,” it is the biggest simultaneous drop since 1976. This article was on May 4th. Based on the above numbers you can see that the spread between the loss in bonds is slowing compared to the S&P 500 decline.
With the uncertainty of the war in Ukraine, its impact on energy prices, the supply chain, and China’s zero COVID policy, it is possible the market may continue to decline.
It has been 40 years since we’ve seen inflation. Over the last 20 years, the Fed has promoted a low interest rate environment, also referred to as easy money, which propelled financial markets to higher returns. A large segment of our society, including business leaders, have never operated in an inflationary rising interest rate environment. They don’t know how to behave. It will take time to adjust.
Last year the discussion was about transitory inflation but that referred primarily to pent up demand for travel and leisure activity. There are now other factors affecting inflation more broadly.
As an aside, the May 13th Wall Street Journal listed inflation rates in various cities comparing April 2021 to April 2022. Surprisingly, San Francisco was the lowest at 5%; New York was 6.3%; LA was 7.9% and the highest was Phoenix at 11%.
The Fed is trying to control inflation by raising rates more rapidly than originally planned. They are also unwinding their practice of buying bonds. As we’ve seen, this adds to the volatility.
According to the Labor Department, the unemployment rate is at its lowest in 50 years. Yet there are almost 2 jobs open for each unemployed worker. The most glaring problem is the reduction of the labor force participation rate. To be counted as “unemployed” in the unemployment calculation, you must be actively seeking a job.
The Labor Department said the participation rate was 62.2% last month compared to 63.4% in February 2020. Vanguard reviewed this shortfall and attributes much of it to:
According to the Labor Department, the annual wage increase is sitting at 5.5% as employers pay more to attract workers. This also contributes to inflation over time.
So, where does that leave us? We believe inflation will decline as we move further into the year though higher than it has been in the recent past. Unless the immigration laws change, we anticipate a worker shortage will continue and wages will rise.
The biggest wild card is the war but the world will adjust, as it always does, to a crisis. Already, Europe had a better investment return than the U.S. in April, according to JP Morgan’s Gabriela Santos, Global Market Strategist.
We continue to keep the long view on your investments. Bond mutual fund losses will level out as old bonds mature and new ones are purchased at higher interest rates. We have made adjustments to portfolios reducing growth components (e.g., technology) in favor of value which often does better in an inflationary environment.
If you are taking distributions, we already have cash and short-term bonds ready to fund your withdrawals. And, as legendary investor Warren Buffet said, “Be fearful when others are greedy and greedy when others are fearful.”
Let’s move to some good news.
The European Union is hard at work creating alternative energy for fossil fuel. An array of 12,000 solar panels is about to become Europe’s largest floating solar park/hydro dam integrating with a Portuguese reservoir. Portugal’s principal utility company plans to be 100% renewable in 8 years.
Four California condors, bred in captivity, were released into Redwood National Park. It is the first time they have been in the park in 130 years.
I am off on my cruise to Alaska May 30th. I was there almost 20 years ago. It will be interesting to see the changes, especially in Glacier Bay from my last trip.
As always, feel free to contact us if you’d like to chat.