April was a particularly difficult period as both stocks and bond returns plummeted and volatility spiked. Many factors, including rising inflation, central banks tightening, interest rates rising, supply chain issues, and the Russia/Ukraine war pressured financial markets. Bonds were down 3.79% for the month and are now down 9.5% year-to-date. The S&P 500 dropped almost 9% in April and small-cap stocks sank nearly 10%. International stocks fared a bit better with developed markets declining 6.38% and emerging markets falling 5.55%.
This month we focused on the following topics:
- What Could Go Right – Several economists we respect and have followed for years are modeling a low probability of a recession in the next 12 months. If that is the case there is room for stock performance to improve. There are multiple signs that inflation may have peaked and will start to turn down. While the pandemic is not over, the supply chain may continue to recover and spending on services will pick up, improving both inflation and global economic growth.
- What Could Go Wrong – Even if the US avoids a recession in the next 12 months, a slowing of the economic growth may cause a “recession scare.” The risk of a European recession has risen and could increase the risk to global stocks. Omicron could spread causing further disruptions to the supply chain which would be a negative to inflation and global growth. Inflation expectations could begin to affect consumers and force the Fed to be more aggressive.
- Next Steps – At this stage of the business cycle it is important to adapt your investment strategy. The market has lost faith in speculative growth companies and is shifting towards higher-quality companies with stable earnings and growing dividends. We will be actively looking for opportunities to upgrade portfolios and do some tax-loss harvesting during the correction.
