The Volatility Continues...

Markets teetered between red and green throughout May, ultimately ending down as another bout of volatility dipped US stocks toward a bear market and marked one of the longest down streaks in decades.

On several occasions, the S&P 500 treaded close to a bear market, officially classified when the index closes at least 20% below its peak. This would have signified the end of the pandemic-induced bull market of the past few years. Earlier last month, the Dow Jones Industrial Average hit eight straight weeks of losses, the first streak of such a duration since the Great Depression, while the S&P 500 and Nasdaq had seven weeks of loss, the longest streaks since 2001.

The volatility reflects deteriorating sentiment for both investors and consumers as they react to economic data concerns, mixed earning reports, and worrisome global economic outlooks. Inflation remains top of mind as major companies earning reports highlighted the ongoing price increases.

Fixed Income

In fixed income, the 10-Year Treasury Note yield increased from 2.75% to 2.84%, furthering challenging bond market investors as yields and prices move inversely. The anticipation of the Fed continuing to pursue its tightening cycle remains a concern and is being carefully monitored.

For more on rising rates, inflation, and portfolio construction, read the latest ‘From the Desk letter’ from our Managing Director of Fixed Income.

Inflation & The Economy

As of now, the economy remains in decent shape and there is still substantial consumer demand for goods and services. The labor market is tight, and predictions suggest it will tighten even more in the upcoming months. But those caveats aside, markets are forward looking, there are significant concerns on the horizon, especially regarding inflation.

Addressing persistent inflation has been the Feds top priority as they’ve raised rates twice so far this year and are on track for the most aggressive pace of hikes since the 1980s. We, of course, can’t talk about combatting high inflation without also considering the consequences of a potential recession.

The central bank and its monetary policy choices are not the only determining influence on the trajectory of the global economy. Other factors, including China’s stimulus efforts, global energy supply and demand, the path forward in the Russia-Ukraine war, and loosening supply chain constraints will all play a role, as will the health and confidence of US consumers and businesses.

Our Perspective

Our research team has been tracking all the above, as well as monitoring fundamentals in efforts to gradually adjust client portfolios. Overall, there have been incremental moves to de-risk in our traditional, multi-asset class strategies.

Looking ahead, it’s our belief that we are in a mid-to-late phase of the economic cycle, even if the anticipated recession is not imminent. Therefore, our response is to identify companies with strong business qualities while being cautious of building risks. The beauty of having both top-down and bottom-up analysts is that both sides will monitor their respective points, collaborate, and make holistic decisions.

The Unnerving Duo: Fixed Income & Volatility

At the same time as the stock market is experiencing a correction, bond markets are feeling the pressure too. The Fed’s inflation fight, is driving up interest rates and impacting fixed income performance, sparking questions of bonds' diversifying role in client portfolios.

As a result, there’s a never-ending list of questions related to what to do or what’s coming next. We tapped into our Research teams’ expertise for insights on the state of fixed income during this period of volatility. Get the answers in FAQ: Fixed Income & Volatility.

Our View
Economic Cycle		Economic growth remains unfazed, and the economy is moving later cycle with speed; many countries are now lapping their fiscal spending programs, causing the massive liquidity tailwinds to begin to dissipate
Stock Market		US stock market volatility has dramatically picked back up; they remain below all-time highs; valuations are still elevated and there are a variety of rising risks that warrant monitoring
Bond Market		Interest rates have risen well off their lows reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads remain historically tight
Foreign Exchange		While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly; the rise in geopolitical tensions has only increased uncertainty or made the environment less clear in the near- or medium-term
Important Issues on the Radar		COVID-19: the worst of this economic crisis is behind us, and with multiple waves of the virus, including the Omicron variant, the attention is shifting to learning how to live with the virus; potentially impacting recovery, financial markets and currencies regionally
		Ukraine-Russia War: we believe an environment of elevated geopolitical risks over the coming months would entail a general risk-off environment; lending upward support to the dollar, gold, and commodity prices
		China’s Economy: China is an outlier regarding policy and has shifted to a gradual loosening stance while most of the developed world begins to tighten; debt and property markets remain major issues; trade tensions continue to impact global trade and supply chains
		Inflation: a confluence of massive policy stimulus, tight labor markets, gummed-up supply chains, and rising energy costs are causing inflationary forces to broaden and become more entrenched than previously expected; conflict in Ukraine and lockdowns in China have added to price pressures

Sources: Wall Street Journal

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