Financial market performance since the start of the year, and in particular since the end of the first quarter, has been sobering to put it mildly. While these type of market gyrations are never fun, it may be helpful to provide some context. In the last ten years, there have been just two quarters when the S&P 500 index declined by more than 10%. Think about that for a moment! And one of those quarters was at the start of the pandemic. Simply put, financial markets have been behaving favorably for too long and investors have become unaccustomed to the volatility. However, market volatility is normal and is healthy in the long run.
Markets are currently reacting to an enormous set of changes in a compressed period of time: the on-going pandemic, the outbreak of war, supply chain disruptions (made more challenging by the war), high inflation (made incredibly more challenging by the war), and changes in monetary policy.
There were very few places to hide during the first four months of the year. Equities across the board struggled: the S&P 500 index -12.89%, MSCI EAFE index (Developed Markets) -11.74%, MSCI Emerging Markets index -12.10%. Bonds also had a difficult few months: the Bloomberg Municipal Bond Index -8.82%, the Bloomberg U.S. Intermediate Aggregate Index -7.09%.
Pretty much the only areas of the market that have performed well this year include energy and just about anything commodity-related. However, their recent performance is almost entirely due to the war in Ukraine. If there was a sudden end to the conflict, many commodity prices would be highly vulnerable to a significant pullback. Moreover, investing in commodities directly remains extremely risky since it is essentially speculation as commodities do not generate cashflows and are inherently volatile.
In the fixed income sector floating rate bonds have held up best, yet that is the segment of the market that offered the skimpiest yields over the last several years. Even with monetary policy in motion, market yields will be in flux from a variety of factors which could lead to reversals in valuations, and higher yields will help when reinvesting maturities and coupon payments. Don’t give up on bonds when they’re finally representing good value after two years of low yields.
Inflation, which many (including the Federal Reserve) had hoped might be closer to going away once the pandemic became less of a problem and consumer spending shifted back toward services and away from goods, has not only remained persistent but has in fact accelerated due to the war and continued supply chain disruptions. These developments have forced the hand of central banks to become more vocal and rapid in their policy response for fear of completely losing the confidence of markets in their inflation-fighting credentials. While central banks are clearly chasing markets, we do view this as being helpful in curtailing some of the exuberance that led to the easiest financial conditions in years.
We believe each of the risk factors noted above pose greater threats to foreign economies, in part due to the obvious location of the war but also to the unique challenges on the commodity front for those economies. For that reason, we expect inflationary pressures will be greater outside the US and we remain more sanguine about domestic markets finding their footing sooner than foreign markets.
Lastly, we maintain an unwavering belief that events like this represent opportunity. Markets reprice when the facts change, but historically they have rewarded investors who remain calm and stick to their plan. Attempting to time the market is not a repeatable strategy as shown in the accompanying exhibit, which is similar advice we provided after the pandemic wreaked havoc a little over two years ago.
Chart courtesy of The New York Fed
Maple Capital Management, Inc. (MCM) is an independent SEC Registered Investment Advisor with offices in Montpelier, Vermont and Atlanta, Georgia.
This commentary reflects the views of MCM and should not be considered to be investment or financial advice. MCM does not warranty these views and will not update this communication after the date of publication. Any mention of specific securities is done for illustrative purposes and the securities mentioned may or may not be held in client accounts. No assumption or assurance should be taken that securities mentioned will be safe or profitable investments.
For further information, please contact Steven Killoran at 1-802-229-2838 or at [email protected] For further information about Maple Capital, including a copy of our informational brochure, please visit our website at www.maplecapital.com.