Broker Check

Market Commentary

May 2022

Volatility escalated in April; worst month for stocks
since March 2020

The global financial markets have been besieged with market moving headline news to start 2022, and April was no different. While already assimilating Russia’s war in Ukraine, global supply chain constraints, high inflation, and aggressive Fed speak on raising interest rates, the news of China’s latest Covid lockdown in its two largest cities unnerved the markets already concerned about a global slowdown and inflation implications.  The toxic cocktail sent stocks and bonds reeling in April. It was the worst month for stocks since March 2020, the beginning of the Covid pandemic.

The markets, especially in the US, have been experiencing the unusual combination of volatility in both stocks and bonds at the same time. Volatility in bonds has been comparable to stocks, as interest rates have risen sharply in reaction to the Fed’s aggressive guidance on raising interest rates to combat escalating inflation, which has hit levels not seen since the early 80s. March CPI hit 8.5% for the trailing 12 months. However, core inflation (ex-energy and food) moderated, an encouraging sign. Bonds characteristically provide a ballast against stock volatility over the long-term, with bonds often benefitting from a flight to safety when stocks decline. However, the sharp rise in interest rates and volatility in bonds has contributed to the volatility in stocks. The benchmark 10-year Treasury Note yield jumped 0.57% in April to close at 2.89%, a level not seen since December 2018. The 30-year fixed mortgage rate closed at 5.10%, the highest rate since 2010, and up from the all-time low of 2.65% in January 2021 (Freddie Mac). The Bloomberg Aggregate Bond Index fell 3.8% in April, closing the month down 9.5% for the year.

The market is anticipating the Fed will raise its key federal funds interest rate at least 0.50% at its May 3-4 FOMC meeting, and the same in June, July, and September. The Fed is expected to raise rates at each of the remaining six meetings in 2022, and it hasn’t taken 0.75% off the table either. The widely watched 10-year minus 2-year Treasury spread briefly inverted in early April but settled positive at month-end. The 10-year and 5-year Treasury spread remains inverted. Yield curve inversions are often seen as a precursor to recessions and bears watching; however, they are not always accurate. Despite a surprise 1.4% contraction in Q1 GDP, recession risk in 2022 remains low though rising for 2023.

Interest rate sensitive technology stocks, and growth stocks in general, were hit the hardest in April, with the Nasdaq composite plunging 13.3% to close the month in bear market territory down 21.2%. The benchmark S&P 500 fell 8.8% in April and back into correction territory for the year. Each of the major US indexes closed April in at least correction territory, save for the Dow Industrials at -9.3%, following a 4.9% April loss. Small-caps and mid-caps, fell 10% and 7.2%, respectively in April, as measured by the Russell 2000 and S&P 400.  Q1-22 corporate earnings have been beating expectations, though earnings growth has slowed as expected from the scorching pace in 2021. With nearly 55% of the S&P 500 reporting, 80% have beat expectations, according to FactSet, though earnings growth slowed to 7.1% annualized from 47.7% for 2021.

Losses for stocks continued overseas as well, with the benchmark MSCI EAFE losing 6.8% to close down 12.9% for the year. Emerging Markets slid 5.6% to finish down 12.7% YTD.

As noted earlier, the multi-factor combination of geopolitical risks and uncertainty surrounding Russia’s war and invasion of Ukraine, surging inflation, rising interest rates, an aggressive Fed, and now the China Covid lockdown, has given the global financial markets and investors a lot to digest at one time. As a result, volatility remains in the forecast. As these factors improve or get resolved, they can each become catalysts for a rebound. It’s the timing, however, that remains impossible to predict.

As we’ve noted before, it is important to remember that market corrections of 10%+ are a common part of the long-term investment process and happen on average about once a year, according to Capital Group, while 15%+ declines happen about every three years.  Even bear markets of -20% or more, though rare about every six years, must be endured periodically. Nonetheless, they test even the most seasoned investors’ resolve.

2022 remains a challenge for investors amid an escalation of volatility. During these volatile periods, we rely on our time-tested discipline and encourage investors to:

  • Remain well-diversified and think long-term
  • Maintain discipline and patience
  • Refrain from making large portfolio changes
  • Review your Risk Tolerance

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.   

~Your Nelson Securities Team    

*Past Performance is No Guarantee for Future Results