How Does it End?
In recent years, the Federal Reserve meetings have become the major focal point for markets, and the decisions made during these meetings are probably more important now than ever before. On Wednesday, the policymakers raised the fed funds lending rate by 0.75%, which was the largest incremental increase in over 25 years. The next Fed meeting will be held in July and investors are predicting another 0.75% interest rate hike. This month, the Fed also started the process of unwinding the most recent Quantitative Easing program which began in response to COVID. With the shift, the central bank is no longer actively buying treasury bonds and is allowing the current $9.0T held on the Fed balance to slowly runoff as bonds mature each month. A shrinking Fed balance sheet puts additional upward pressure on interest rates.
The selloff in equity markets hastened this month as investors priced in the increasingly Hawkish monetary policy. Despite a slight recovery today, this year the S&P 500 is down 21.9%, the Nasdaq is down 30.2%, and the Russell 2000 Small-Cap index is down 25.0%. Typically, when equity markets crash, bonds provide support and offset the losses.
However, the bond markets have dropped significantly as well (due to Fed policy), with the Bloomberg Aggregate Bond Index down 11.5% YTD which means the bellwether 60/40 portfolio is down nearly 18% this year. If the year ended today, this would mark the worst year for a 60/40 portfolio since the 1930s.
So, when/how does this end? Below is a list of events we are watching for, which will give clues to the beginning of the end of the bear market:
- Earnings Recession/Margin Compression (already happening, e.g., Walmart and Target)
- Earnings Revisions (a small number happening and will pick up as Q2 earnings reports come in)
- Monetary Tightening (in process)
- Shrinking Free Cash Flow
- Junk Bond Market Dries Up
The volatility is going to lead to an unprecedented opportunity to buy great companies at attractive price points. It is our job to protect your purchasing power in the interim and to watch for the data AND sentiment to turn the other direction.
As a reminder, our portfolios have short positions against each of these markets to help soften the blow.
Lincoln Sorensen, Family Wealth Advisor & Co-Founder
