Trending Topics


This Month’s Trending Topics

 

Markets
Unfortunately, markets continue to be the trending topic on many of your minds.  After a small bounce in March, markets resumed their selloff in April.  Equity markets are once again down double digits for the year and some segments of the bond market are having their worst year ever. Everything seems to be selling off together with very few safe places to hide. What has been driving this selloff?

The Federal Reserve has finally changed its tone and appears to be focused on fighting inflation.  Inflation appears to be real and not “transitory or temporary” as once was forecast by many, including some Fed officials.  The question now is, will the Fed sacrifice growth and possibly even drive the US economy into recession to contain inflation?   The Fed is expected to raise interest rates by .5% at their next two meetings, which is a faster increase than markets anticipated coming into the year.  This, along with the continued conflict in Russia/Ukraine, have been the main drivers of the selloff.   

When account statements arrive shortly, be prepared for a big drop.  While never pleasant to see, remember that double digit pullbacks are common and historically happen almost every year.  

So, what is there to be positive about when everything seems doom and gloom?

  • Year over year corporate earnings growth remains strong.  While some companies have disappointed, overall growth remains intact so far. Good companies with strong future growth potential are being sold off with the bad allowing managers to step in and buy on the dip which may enhance future returns.  
  • Corporate and personal balance sheets remain strong.  Many came out of COVID much stronger financially which should help cushion the blow if the economy slows. Cash balances remain high, meaning there is money on the sidelines which could be spent or invested.
  • While the housing market has boomed, banks are much more stringent on lending standards. Many homeowners currently sit with equity in their homes unlike 2008 when so many were underwater. There is much more of a cushion in housing which reduces the risk of declines spilling over into the equity markets.  
  • Higher interest rates may lead to higher future returns on safer assets.  While many bonds have taken a hit this year, maturing bonds are being reinvested into higher yielding bonds which should help future returns.   Some savings accounts and CDs have seen an increase in rates which should continue as the Fed raises rates.
  • Series I Bonds yielded 7.12% (annualized) through the end of April and are expected to yield higher over the next 6 months.  Consider utilizing for safe money that you are comfortable locking up for at least 12 months.  (Subject to $10,000 investment limit each year)  
  • If you have money on the sidelines that you were waiting for a dip to invest, you are getting a dip.  If you make regular contributions to a retirement plan each month, you are buying shares much cheaper now than last month.   

The risk of recession has increased and we wouldn’t be surprised if one happens.  At the same time, it’s hard to predict a recession and you usually don’t know one happened until after it’s over. This is why trying to time the market is so difficult and successfully executed by so few if any.    


This is a good time to evaluate your own risk tolerance and be sure you can handle these types of swings and understand that bigger swings may occur.  If you are feeling uncomfortable with the volatility, please reach out and we can discuss where you are and if changes are needed.  We always maintain that staying invested is the best course of action, but it’s also better to adjust down 10% than down 30%.   

This is also a good time to evaluate your spending and savings.  If you believe inflation will remain elevated, this may be a good time to increase your savings rate or look to trim expenses.  If you have a gym membership that you haven’t used in years or are paying for streaming services you don’t watch, now might be a good time to look at the budget and make cuts for those no value items.

Review meetings
We've enjoyed getting to see your faces once again as many of you have returned to our office for review meetings.   We will continue to give you the option of an in-office meeting or call/online meeting.  Many find online meetings more convenient and we want to make scheduling and meeting as easy as possible.   

We’ve been using join.me as our screensharing software for years. We are now making Zoom available as an option, if you prefer video chat and seeing our faces, but want to maintain the convenience of meeting from your home.   We are still able to screenshare with Zoom, but can get back to face to face interactions which many of us have missed over the past two years.  

When we reach out to schedule your review meeting, please let us know if you prefer to come into the office or continue with the call/online option.   If online, please let us know if you would like to use Zoom so we can see each other.  If you prefer to keep it as a phone call, we are happy to do so.    

Please reach out if you have questions or need anything moving forward.

 


This material is meant for general illustration and/or informational purposes only.  Views expressed in this newsletter may not reflect the views of Royal Alliance Associates, Inc.  It is our goal to help investors by identifying changing market conditions.  However, investors should be aware that no financial advisor can accurately predict all of the changes that may occur in the market.   This material should not be relied upon as investment advice.  Investors should note that there are risks inherent in all investments, such as fluctuations in investment principal.   International investing involves special risks including greater economic and political instability, as well as currency fluctuation risks, which may be even greater in emerging markets.  There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. This article contains forward looking statements and projections.  Past performance is no guarantee of future results. .  Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice.