Stocks Rebound in March - Will It Continue?

Welcome to April!

Stocks recovered in March on the strength of positive economic data and the possibility of peace talks starting up between Russia and Ukraine. Despite the positive move, some investors are nervously eyeing the yield curve after it briefly inverted at the end of the month (more on that below).

Peace on the horizon? Representatives for Russia and Ukraine are scheduled to resume negotiations, hopefully ushering in a resolution to the conflict. Russia is the world’s largest exporter of wheat and second-largest exporter of petroleum, so as the world grapples with escalating inflation lead by food and energy prices, peace talks are a welcome development.

Corporate profits soar. Despite widespread supply chain issues and labor shortages, corporations benefitted from robust consumer spending and soared to profit levels not seen since 1976. Consumer spending accounts for around 70% of the US GDP, so where the consumer goes, the economy tends to follow.

Yield curve inverts. The yield curve briefly inverted at the end of the month, triggering concerns that the economy may be heading towards a recession. While the yield curve is a very reliable recession indicator, there are some important caveats to keep in mind before taking any action, which we discuss in greater depth in the Economic Update section. In summary, one indicator does not guarantee we’re getting a recession.

On another note:

What a run! St. Peter’s men’s basketball team finished a historic run during this year’s NCAA Men’s Basketball Tournament. The Peacocks became the first 15^th seeded team to advance to the Elite Eight, upsetting well-known (and significantly better funded) teams like Kentucky and Purdue before finally falling to the University of North Carolina. They last appeared in the tournament in 2011. 

We’re grateful to be part of your financial coaching team. If there’s anything you need, please schedule some time with our office.

Stocks

All three indexes advanced in March, shaking off the anticipated interest rate hike and geopolitical concerns to finish in the green.

Sector Performance

While all sectors were positive in March for the first time this year, the Energy sector remains at the top of the heap, powered by record-high global gas prices. The Utilities sector – which contains stocks of companies that operate regional electric and water services – turned positive for the year, powered by a blistering 10.36% March performance. Communications and Consumer Discretionary stocks continue to struggle, underperforming the broader market.  

Bonds

As expected, all three major bond indexes lost ground in March following the Fed’s interest rate hike. With no sign of inflation abating, the Fed has signaled its willingness to pursue a more aggressive interest rate policy this year, even going as far as suggesting up to eight interest rate hikes. Given these headwinds, bond returns may be challenging in the year ahead.

Economic Update

US economy remains strong. The economy continues to show signs of strength in key areas:

• The unemployment rate improved to 3.6% in March from 3.8%, back to pre-pandemic levels.
• Job creation figures were under expectations, though still finished strong at 431,000 new jobs (490,000 expected)  
• Wages were up in March by 0.4% after February broke a ten-month streak of gains. Wages are up 5.6% year-over-over.

A Note on the Yield Curve

Recently, you may have seen some headlines talking about the “yield curve” and what it may mean for the economy. Specifically, the media often jumps to a recession watch when the yield curve inverts. While this might make for compelling headlines, an inverted yield curve is just one indicator of the economy’s possible direction. So let’s put these headlines into context.

First, what is the yield curve, and what does it show? The yield curve is a graphical representation of interest rates (yields) paid out by US Treasury bonds. A normal yield curve shows increasingly higher yields for longer-dated bonds, creating an upward swing. An inverted curve has a downward slope, indicating that shorter-dated bonds yield more than longer-dated bonds, which isn’t typical.

Does an inverted yield curve mean we’re headed for a recession? Based on the historical track record of this indicator, yes, an inverted yield suggests a recession may be coming. Since 1976, a recession has followed an inverted curve every time. However, there are some important caveats to mention here:

An inverted yield curve needs to remain inverted to be considered an indicator. It’s normal for markets to fluctuate as conditions and investor sentiment ebb and flow. But, according to the experts, for an inverted curve to be a recession indicator it needs to stay inverted for a month or more, historically.

Source: PGIM

Recessions aren’t instantaneous. An inverted yield curve doesn’t mean a recession is just around the corner. Since 1976, the average time between an inverted yield curve and an official recession has been around 18 months; the longest was nearly three years. That’s plenty of time to prepare!

It’s also worth mentioning that an inverted yield curve doesn’t cause a recession. The yield curve reflects bond market sentiment – it doesn’t drive it. The yield curve inverts when bond market investors feel like something may be up and, in response, favor shorter-term bonds over longer-term ones.

It’s a deceptive signal for your portfolio. An inverted yield curve doesn’t mean it’s time to sell! Historically, the market continues to advance following an inverted yield curve, gaining an average of 11.5% real return (net of inflation) since 1976. Don’t let one indicator spook you!

The takeaway here is that while an inverted yield curve may be unnerving, it’s by no means cause to panic. If anything, it’s an opportunity to assess your portfolio’s allocation against your risk tolerance, evaluate your household’s current spending, and potentially increase your emergency fund. Our team is closely monitoring economic conditions and will proactively alert you should we feel action needs to be taken. In the meantime, feel free to call us if you have any questions or concerns.

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THOUGHT FOR THE MONTH

^{Index Definitions}

^{Dow Jones Industrial Average: The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.}

^{Dow Jones U.S. Real Estate Total Return Index: The index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.}

^{NASDAQ Composite: The NASDAQ Composite is a market-cap weighted index of all issues listed on the Nasdaq stock exchange. It is heavily weighted towards the technology sector.} 

^{S&P 500 Bond Index: The S&P 500® Bond Index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities. Market value-weighted, the index seeks to measure the performance of U.S. corporate debt issued by constituents in the iconic S&P 500.}

^{S&P 500 Consumer Discretionary: The S&P 500® Consumer Discretionary comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.}

^{S&P 500 Consumer Staples: The S&P 500® Consumer Staples comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.}

^{S&P 500 Energy: The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.}

^{S&P 500 Financials: The S&P 500® Financials comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.}

^{S&P 500 Index: The S&P 500® index is a market-cap weighted index of the largest 500 companies headquartered in the United States. The index covers approximately 80% of available market capitalization.}

^{S&P 500 Utilities: The S&P 500® Utilities comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.}

^{S&P U.S. Aggregate Bond Index: The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. The index is part of the S&P AggregateTM Bond Index family and includes U.S. treasuries, quasi-governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non-U.S. debentures, covered bonds, and residential mortgage pass-throughs.}

^{S&P U.S. Treasury Bond Index: The S&P U.S. Treasury Bond Index is a broad, comprehensive, market-value weighted index that seeks to measure the performance of the U.S. Treasury Bond market.}

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