By Morgan Christen
CFA, CFP, CDFA, CEO and CIO
Welcome,
There is some speculation that April Fools’ Day is tied to the vernal equinox or the first day of Spring. This tends to be a time when Mother Nature fools us with unpredictable weather. Pull out your swimsuit only to be hit with cold weather and snow.
April Fools’ Day is when you prank someone and then acknowledged it as “April Fools.” We are all waiting for the markets to yell that out. That was not a fun April, especially as Marty Rubin is noted as saying “April is the kindest month.”
Asset allocation, while not guaranteeing success, usually does a great job at balance out a portfolio. One is up the other may be down and vis versa. This year not so much. Both stocks and bonds are down as they have felt the impact of higher interest rates.
Bonds
Bond prices have rapidly incorporated the latest inflation data as well as Fed speak. Higher future inflation and their corollary, higher interest rates make current bonds less attractive.
If I can buy a newer bond with a larger coupon, then that old bond with the lower rates does not look so attractive. The market starts to demand higher rates which pushes down values.
The good news when you own a fund is the manager is now reinvesting at these higher rates, which historically has enhanced values over the long run. On the bond front, the current pain we feel is short term and should right itself over time.
As the chart below shows, bonds produced positive numbers over prior Fed rate raising regimes. The bond market has incorporated the Fed moves as yields moved up accordingly and are now reflected in current yields. rates which pushes down values.
The inflation story is fluid, just when we started receiving reports of supply chains improving, another shoe drops.
Notice the Twitter posting by Dr. Scott Gottlieb. China’s zero-Covid policy is shutting down major arteries.
Those dots are ships waiting to load/unload goods in Shanghai harbor.
Makes the boats off the California coast look like a parade.
By the way, Shanghai is one of the world’s busiest ports.
Stocks
Stocks have grabbed the headiness in 2022. The market, especially technology as represented by the NASDAQ, is taking the brunt of it. Miss your numbers and you are punished… feel me Netflix. Consumers have moved from buying technology to purchasing services. The get-out-of-the-house trade.
Along with Netflix, there were many hot pandemic stocks like Etsy, Moderna, PayPal, and Zoom.
Those stocks are represented in the index we all follow. Netflix and Zoom in the Nasdaq, Etsy in the S&P 500, and PayPal and Moderna in both the S&P 500 and the NASDAQ.
All these stocks had major moves to the downside. They were also on the high side of their valuation (overvalued).
There are days when the “market” sells off, but lately we can point to a few bad actors bringing the indices down.
The point is, there are stocks that deserve lower valuation. These market gyrations are generally not felt by the larger more rationally valued stocks (for example JNJ).
Diving into the markets, not all aspects are bad. In fact, historically they have done well in inflationary periods many times better than commodities.
May Day
Much like a renter on deferment, after many solid years of returns, the market is beginning to charge rent. Sometimes this happens. The free ride many speculators have taken is coming to an end. Unfortunately, we all are participating.
At Spinnaker we are not overexposed in the tech sector, nor were we allocated to the pandemic stocks, so while the down is not enjoyable, for many it is worse. If you were to take out the FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks, the S&P 500 would not look so bad.
Bonds will continue to pay interest and rates will level out. All of this is normal in a well-functioning market. Stocks and bonds are being repriced, but that does not change the fundamental value inherent in companies we own.
We appreciate your continued support and are grateful for the trust you place in us. We look forward to speaking with you soon.
Disclosure
The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
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