The final full week of April might best be described as a tug of war between big macro concerns and favorable micro inputs. All of which combined such that the domestic stock market was unable to find direction throughout the week and concluded virtually unchanged over the 5 trading days ending April 27 (as measured by the S&P500 and broad Wilshire 5000). By contrast, reference-rate bonds on the other hand experienced a noteworthy development wherein the 10-year US Treasury climbed above 3% for the first time in more than 4 years (it closed the week just under at 2.96%) and the Fed is signaling no intention of slowing their hikes. As recent as year-end the same bond maturity sported a stubbornly low yield of just 2.4%; so the roughly +60 basis point rise represents a +25% adjustment in just 4 brief months. With the US Federal reserve and other major monetary authorities around the globe continuing to communicate a preference toward further normalization, including through rate hikes, rates seem poised to rise further.
Choppy market action that persisted throughout February and March is continuing this month against an increasingly unpredictable political backdrop. 2Q began with a horrible first day and stressed week, but the slide was reversed last week despite no shortage of fresh unsettling headlines. For the week ending Friday the 13th, the S&P added +2%; some of the momentum areas hardest hit in recent weeks (Amazon, Tesla, Facebook) also managed to enjoy some of the best relative performance as the negative news flow for them eased a touch. Interesting though amid the choppier weeks is that smaller-size companies have actually fared better than their larger-cap brethren. Of additional merit, credit spreads (often a leading indicator of problems below the surface) tightened last week, suggesting that while US equities remain in closer proximity to the lows of the correction range than the upper, the underlying economic and corporate fundamentals are still perceived as OK. In that regard, the correction is appearing to maturing, and maybe nearing a tradeable conclusion.
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The stock market ended the quarter much different than it began. Stocks roared in January with the S&P500 jumping more than 5% to set repeated records; until January 26th. Then, it’s as though the electrician changed the direction of the wall switch. As we wrote in our March commentary, “Agitation Overdone”, the current pullback is the first drawdown exceeding -5% since February 2016 (almost 2 years), or 404 trading days. The February drawdown took 10 days to erase -10%, wherein 83% of stocks declined -10% or more and the average stock gave up -14%. March vibrated back and forth, retesting the February lows. Corrections (-10% decline or more) are never comfortable, but most evolve into new rallies. The evolution process typically involves 3 components – price, time, and emotion. Price action can be quick, while emotional change takes time before playing out. It seems probable that additional time and the evaporation of bullish emotion (sentiment) are needed before the Bull run continues. An important part of any corrective process is converting optimism to pessimism. Today, we are closer than at the early-February lows, which were retested in late March/April – now almost 30% of stocks are down 20% from their highs.
If you are at the doorsteps to retirement, you might regularly receive invitations to enjoy a free lunch/dinner as part of an “educational” seminar on various retirement, estate planning, or trust topics. Often these invitations are made extra enticing by featuring a fancy restaurant for the presentation. Yet as the saying goes, few of us believe these meals/events are without any strings attached; we know there will be some “catch” or pitch of a product or service.
One topic we regularly encounter with new clients approaching us for help is in the area of annuities. While there are advantages and disadvantages to these complex products, in our experience, they are often sold without full and adequate explanation. While we prefer and advocate the use of more customizable, and traditional investment structures (wherein you retain full control of your time horizon, investment options, and access to money), we would stop short of saying or suggesting that annuities are never appropriate. So let’s objectively review one of the most misunderstood financial products available.