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The Markets
Risk-on. Risk-off. If you read the financial press, you may have seen the terms “risk-on” and “risk-off”. When investing, there is a risk-return spectrum. Stocks typically have higher risk and higher return potential than high-quality bonds. High-quality bonds have lower risk and lower return potential than stocks, although they typically have higher risk and higher return potential than cash. In financial speak, investors are:
Last week, investors moved from a risk-on to a risk-off outlook. The change in attitude resulted from concerns about:
During periods of market volatility, it’s important to keep a long-term perspective. Having an asset allocation strategy that reflects your risk tolerance and financial goals helps insulate your assets from market turbulence. Asset allocation helps manage risk, but it does not prevent losses. Last week, major U.S. stock indices moved lower. Yields on U.S. Treasuries were mixed. The Markets
The market whisperer… Last week, the Federal Reserve (Fed) left the federal funds rate unchanged, and Fed Chair Jerome Powell soothed markets. He explained that conditions in the labor market were broadly in balance and inflation had eased significantly over the past two years. Overall, the possibility of recession, while rising, remained low. Markets rallied following his comments. The economic outlook for 2025 The Fed’s current median forecast for economic growth in 2025 is 1.7 percent, a bit lower than it was in December. In addition, the Fed’s current median estimate for inflation is 2.7 percent, a bit higher than in December. While he was reassuring, Powell explained there is a lot of uncertainty about the economic outlook in the United States. He stated: “Looking ahead, the new administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy and regulation. It is the net effect of these policy changes that will matter for the economy and for the path of all monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high. As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves.” Consumer spending and the wealth effect Powell also said that it remains to be seen how consumer and business spending and investment will respond to heightened uncertainty about the economic outlook. It’s an important point because of the “wealth effect”. The wealth effect is a theory in behavioral economics. It holds that people spend more when the stock market is rising and the value of their assets is growing. Conversely, people spend less when the stock market is falling and the value of their assets is declining. It’s difficult to quantify the effect as Mike Bird of The Economist explained: “Estimates of the ‘wealth effect’ – the amount that rising or falling stocks can support or hurt consumer activity – vary wildly. One academic study in 2019 suggested that a dollar increase in stock market wealth boosted American spending by about three cents. [A large financial-services firm] suggests that the pass-through has risen significantly in recent years, coming up with an extraordinary figure of 24 cents. Whatever the true number, a declining stock market matters for the broader economy.” Last week, major U.S. stock indices finished higher, while yields on most maturities of U.S. Treasuries moved lower. The Markets
A correction and a bounce. Last week, the Standard & Poor’s (S&P) 500 Index moved into correction territory. The Nasdaq Composite Index (Nasdaq) was already in a correction, and the Dow Jones Industrial Average (Dow) was close, reported Paul R. LaMonica of Barron’s. A correction occurs when the value of an index drops 10 percent below its most recent peak. The S&P 500 correction occurred remarkably quickly. Just three weeks ago, the index was at a record high amid easing inflation pressures and solid earnings growth. In fact, from December 15 through March 6, the number of companies mentioning the word “recession” on earnings calls was the lowest it had been in more than five years, reported John Butters of FactSet. There is another word that was mentioned frequently on earnings calls though: tariffs. Tariffs on tariffs on tariffs The tariff war escalated last week as the European Union (EU) and Canada introduced retaliatory tariffs in response to those of the United States, reported Joe Light of Barron’s. Brendan Murray and Alex Newman of Bloomberg have been tracking the tariffs. Through the end of last week, the United States government has imposed the following tariffs:
“As Americans debate the wisdom of the administration’s on-again, off-again trade barriers…a few broad points are worth bearing in mind,” wrote The Editorial Board at Bloomberg. “One is that these measures are a tax on Americans. Foreign countries don’t simply pay up; US companies do when they import a product. This means that the costs are ultimately borne by consumers and by companies that use imported inputs. The effect of those higher prices is to eat into household budgets, push down real wages and reduce economic growth.” However, an alternative viewpoint would argue that we are currently subsidizing other nations by allowing them to restrict our goods coming into their country, either because of their tariffs or other restrictions placed on our goods, and it has been happening for decades. Additionally, the Trump Administration has stated it plans to offer a lower corporate tax rate to companies who relocate or build their production facilities in the U.S. This should result in greater economic development and greater employment for American workers. If the ultimate goal is to have more goods produced in America by American workers earning wages from American-based companies, then placing reciprocal tariffs on foreign goods coming into our country could make more sense for the long term. Consumers are feeling salty The trade war has raised questions about the path of the U.S. economy, and some economists have lowered their forecasts for economic growth in 2025, reported Brian Swint of Barron’s. The primary driver of U.S. economic growth is consumer spending and consumers – anyone and everyone who buys things – are feeling less optimistic. Last week, the University of Michigan Survey of Consumers reported that sentiment fell 10.5 percent from February to March. Surveys of Consumers Director Joanne Hsu wrote: “Sentiment has now fallen for three consecutive months and is currently down 22 [percent] from December 2024. While current economic conditions were little changed, expectations for the future deteriorated across multiple facets of the economy, including personal finances, labor markets, inflation, business conditions, and stock markets. Many consumers cited the high level of uncertainty around policy and other economic factors; frequent gyrations in economic policies make it very difficult for consumers to plan for the future.” Major U.S. stock indices fell over much of last week before recovering some losses on Friday. The S&P 500, Nasdaq and Dow all finished the week more than two percent lower. U.S. Treasury yields bobbed lower before finishing the week close to where they were the previous Friday. The Markets
What do weather and investing have in common? From 1991 to 2020, the average temperature of the United States was 54.7° Fahrenheit. Of course, that doesn’t mean the temperature in every state on every day was 54.7°F. The weather varied dramatically from place to place and month to month. The same is true of investment averages. At the end of February, the average annual total return* for the Standard & Poor’s (S&P) 500 Index over the past 10 years was 12.98 percent. That doesn’t mean the S&P 500 returned 12.98 percent every year – it didn’t. The index’s total return varied dramatically from year to year. The S&P 500 Index doesn’t provide level returns. In some years returns can be encouragingly positive, and in other years returns are depressingly and even scarily negative – leaving you wondering if your portfolio can dig itself back out of the hole it just dug. After two years, of stellar returns from U.S. stocks, the market recently has been experiencing a pull back, leaving individual investors, again, somewhat cautious about the short term, while institutional investors appear bullish for the longer term. Last week, U.S. financial markets were volatile. “A roller-coaster week for markets ended on that same note, with stocks whipsawing as traders tried to make sense of a myriad of headlines around the economy, tariffs and geopolitical developments. Just minutes after a slide that drove the S&P 500 down over 1 [percent], the gauge staged an ‘oversold bounce’ as Federal Reserve Chair Jerome Powell said the economy is fine. The Nasdaq 100 briefly breached the threshold of a correction. Bonds fell,” reported Rita Nazareth of Bloomberg. In contrast, some European stock markets moved higher last week. “President Donald Trump’s drive to shake up the world order is creating some surprising winners. As the U.S. stock market reels from tariff fears, German stocks are surging because the government has committed to almost $1 trillion in new spending on infrastructure and defense…The sea change in policy is creating a giddy optimism in German markets not seen in decades,” reported Brian Swint of Barron’s. The divergence in performance brings home the value of a diversified portfolio. When markets are volatile, remain confident and resist the impulse to react to short-term performance. The assets in your portfolio were carefully chosen to help you reach your financial goals. Unless your goals and risk tolerance have changed, your asset allocation shouldn’t. The weight of evidence accumulated over previous decades supports the idea that staying the course – holding a well-allocated and diversified portfolio and rebalancing periodically – is a sound way to pursue long-term financial goals. Last week, major U.S. stock indices finished the week lower despite a rebound on Friday. U.S. Treasury yields were mixed last week with yields for shorter maturities dropping while yields on longer maturities rose. *Total return includes reinvested dividends. The Markets
Is it supposed to be doing that? At the end of last year, economists believed the chance of a recession in 2025 was relatively low. In December, economist Torsten Sløk wrote, “The outlook for the US economy remains strong with no signs of a major slowdown going into 2025.” The economy has not been performing as expected, though. “The U.S. Citi Economic Surprise Index, which tracks the difference between economic data and expectations, has fallen to its lowest level in almost six months. The index rises when the surprises are favorable, so the decline means the data are showing a less robust U.S. economy than expected,” reported Jacob Sonenshine of Barron’s. One surprising piece of data is the slump in U.S. consumer confidence. The University of Michigan Consumer Sentiment Survey reported that consumers have become less optimistic. Sentiment declined by 9.8 percent from January to February. The Conference Board Consumer Confidence Index showed a 7.0 percent drop over the same period. “The decrease was unanimous across groups by age, income, and wealth…Year-ahead inflation expectations jumped up from 3.3 [percent] last month to 4.3 [percent] this month, the highest reading since November 2023 and marking two consecutive months of unusually large increases,” reported Surveys of Consumers Director Joanne Hsu. The slump in sentiment is concerning because consumer spending is the primary driver of U.S. economic growth – accounting for about two-thirds of gross domestic product (GDP), which is the value of all goods and services produced in the country over a certain period. In general, when consumers are uneasy, spending tends to slow and so does economic growth. Currently, one consumer group has more influence than others do. When analysts took a closer look at consumer spending, they found a growing wealth gap. “The wealthiest 10% of American households—those making more than $250,000 a year, roughly—are now responsible for half of all US consumer spending and at least a third of the country’s gross domestic product,” reported Amanda Mull of Bloomberg. “In the 1990s, spending by top-decile earners usually constituted a third or so of annual consumer spending overall. Now, their spending constitutes the largest share of the consumer economy in data going back to 1989.” Last Friday, we learned that consumer spending declined 0.5 percent month to month, after inflation, in January. It was the biggest monthly decline in almost four years. “US consumers unexpectedly pulled back on spending on goods like cars in January amid extreme winter weather, and a slowdown in services, if sustained, may raise concerns about the resilience of the economy,” reported Augusta Saraiva of Bloomberg. While we’ve seen a lot of uncertainty and some softer-than-expected economic data, the likelihood of a recession over the next 12 months remains low. Economists polled by The Wall Street Journal’s Economic Forecasting Survey put the odds at 22 percent, reported Andy Serwer of Barron’s. No matter where the economy is headed, investors can manage the risks associated with market volatility through asset allocation and diversification. If you have not reviewed your portfolio recently, this is a good time to make sure your asset allocation is appropriate for your financial goals and risk tolerance. If you would like help, let us know. Last week, the Dow Jones Industrial Average moved higher, while the Standard & Poor’s 500 and Nasdaq Composite Indexes moved lower. Treasuries rallied and the yield on the benchmark 10-year U.S. Treasury moved lower over the week. |
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