April turned out to be an extreme month for investments. The stock market saw the worst monthly performance in over two years while the U.S. 10-year Treasury Note reached its highest rate in over three years (causing bond values to drop). Inflation reached its highest point since 1981. We also experienced surging oil prices and geopolitical tensions. To top it all off, the yield curve inverted for the first time since August 2019—a signal that long-term interest rates dropped below short-term rates. An inverted yield curve suggests investors believe that the near-term economy and markets are riskier than the long-term.
With all these extreme happenings, you may wonder what changes you should make to your portfolio. Our message is to hold the course and take advantage of opportunities. We believe that the current environment is cause for monitoring, not cause for panic.
Higher interest rates can be negative for the stock market, as the cost of doing business rises for companies, potentially impacting their growth rates. However, Bloomberg data shows that in each of the last eight hiking cycles, the S&P 500 was higher a year after the first increase. Of course, past performance is never a guarantee of future results, but the data suggests staying the course.
The following chart shows how stocks reacted during the eleven times since January 20, 2000, when the 10-year U.S. Treasury Note rose by 1% or more without falling by 0.5%.
Fixed-income securities are particularly sensitive to interest rate increases due to the inverse relationship between bond yields and prices. Despite increased short-term volatility, it’s important to remember the role fixed-income plays in your portfolio—diversification, preservation of capital, and reliable income.
The following chart shows how difference sectors in the stock market performed during years with high inflation.
As scary as the economic headlines are, we see opportunities in lower priced stocks, private credit, and real estate. We will continue to monitor the situation and make tactical moves when warranted.