Despite the ups and downs we have experienced year-to-date, stocks remain in positive territory for the year, with U.S. stocks up over 7% and international stocks up over 11%. The U.S. bond market is up about 2.5% year to date. The markets have been resilient given the failures of Silicon Valley Bank – the second largest in U.S. history – and Signature Bank, which heightened risks to the financial system. Despite the banking turmoil, the Federal Reserve remains focused on bringing down inflation.
Over the past week, the stock market has calmed down a bit, and the VIX, the market’s expectation for future stock market volatility, has dropped below 20, which is in line with long-term averages. However, bond markets remain very uncertain about the future path of interest rates. The MOVE index, the fixed income market’s version of the VIX that measures expected future bond market volatility, is higher now than at any time since the financial crisis. Given the elevated level of the MOVE index, we expect to see continued volatility in the bond markets, especially around Federal Reserve and economic announcements.
The next Fed meeting is on May 3, and according to the CME Group, markets are currently pricing a 40% chance of the federal funds rate remaining unchanged at 5% and a 60% chance of the Fed hiking the rate to 5.25%.
If the Fed continues to raise interest rates or keeps rates higher for longer, it could cause more financial distress. On the other hand, if it does not, inflation may become more difficult to subdue. Tight labor markets and potential economic slowdown threaten corporate profits, while geopolitical tensions and the debt ceiling continue to loom.
Sources of Stability
The bond market has rallied on the prospect that the Fed will be slower to raise rates. Workers continue to see strong growth in wages, and the labor market is about the tightest it has ever been. State finances are in a strong position, putting them in better shape to withstand a possible recession.
The Bottom Line
We continue to believe the best approach for most clients is to diversify globally to capture market returns, emphasize small and value-oriented stocks, minimize credit risks while keeping maturities relatively short in bonds, and implement using institutional asset class strategies to invest in a tax- and expense-conscious manner.
If you have questions or concerns about your portfolio, please let us know.
*Sources: Market returns based on market close 4/20/23 as measured by the S&P 500 Index, EAFE Index and S&P US Aggregate Bond Index. Bloomberg. “U.S. Job Openings Drop to 10.8 Million But Are Still Too High for Fed.” March 8, 2023. Pew. “States Build Their Reserves Amid Growing Uncertainties.” Oct. 18, 2022.
Disclosures: For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article.