A Grumpy Start so Far this Year
We are off to a what seems like a rocky start for parts of the market this year.
So far this calendar year, it seems investors are focusing on Inflation rising along with the expectation of the Federal Reserve (Fed) raising interest rates to tamp down inflation, the fast spread of omicron, Russians on the border of Ukraine, supply chain interruptions, difficulty finding workers for many industries etc.
But many of those factors were also there in 2021 and the U.S. stock market did fine. What is the difference?
Perhaps the market feels worse because 40% of the stocks in the Nasdaq are down 50% from their highs, and one out of five stocks in the S&P 500 are down 20%. Yet the S&P 500 is only down about 6% from its high (as of January 21st, the date this is being written).
The chart below shows the performance of large growth stocks (purple) versus large value stocks (orange) since 1991. You can see the growth stock bubble right around late 1990s and early 2000s with the tech and dot com bubble. Then value did better for about 7 years, then they followed each other closely until around 2017- then the growth index looks like a moonshot.
Could the performance of growth stocks versus value stocks come back to a more normal relationship? We don’t know, but we can see from the chart that if it does, it still has a way to go.
Perhaps it has already started. The chart below shows the performance of growth versus value stocks since the start of 2022. It shows growth stocks down about 9% versus just 1.4% for value stocks this year.
Will this trend continue? It would not be surprising to see this part of the investment market do well, as it has underperformed large growth for many years.
Also, international and emerging market stocks have done better than U.S. stocks so far this year.
So far in 2022, being diversified in the stock market has proven valuable.
Regarding the bond market, with the expectations of interest rates rising, what could we expect?
Shorter term bond prices are much less sensitive to interest rate changes than longer term bonds. And we continue to believe it makes sense to keep bond portfolio maturities relatively short.
One thing to keep in mind is while rates in the U.S. still seem low, to overseas investors they are still very attractive. The Fed has said they will raise short term rates, but the rates on longer term bonds may not go up as much we might expect, due to fact that our rates still attract capital from foreign investors. The chart below shows the yields on German 10 government bonds, and what they could earn from the U.S. 10 year government bond, even after they paid to hedge their currency risk.
Earning 1% in U.S. Treasuries doesn’t sound great to us, but to many European investors where government bonds are yielding 0%, our bonds may continue to look attractive.
While there is no perfect portfolio, there are many fine portfolios. The key is having a plan to reach your goals, incorporating only as much risk as is necessary in your portfolio, and sticking with that plan when the inevitable market hiccups occur.
It looks like we may have more volatility this year, and we are here if you have any questions or thoughts. You will hear from us, but don’t hesitate to call in the interim.
Thank you again for trust and confidence.
Disclosure: The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of (AUTHOR'S NAME HERE) and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject
to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Russell 1000 measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 90% of the investible U.S. equity market. The Russell 1000 is highly correlated with the S&P 500 and is reconstituted annually on May 31. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.