May 10, 2022
In response to these events the markets have reacted appropriately, resetting prices in light of changing circumstances namely, higher interest rates and potentially slower global growth. This is normal and is what investors should expect properly functioning markets to do. That being said, it doesn’t make things easier for families or institutions that own financial assets. As of the writing of this commentary, the markets are mostly in correction territory and a case can be made that more uncertainty lies ahead. While year-to-date returns in stocks have yet to reach “bear market” territory, they do feel unusually painful because down equity markets are often accompanied by rising bond markets. That has not been the case in 2022.
On May 4th, the Fed raised rates by half a percentage point, the biggest hike in two decades. The markets seemed to be anticipating this move and responded quite favorably. That response was short-lived. One day later, on May 5th, concerns of stagflation crept into the macroeconomic equation. The Dow tumbled 1,000 points for the worst day since 2020 and the tech-heavy NASDAQ dropped 5%. Stagflation is an economic scenario that occurs when high inflation is paired with slow or no economic growth. This creates a dilemma for Central Bankers because continued rate hikes help quell inflation, but doing may also lead to declines in economic growth.
During periods of volatility, investors often ask what they should be doing. The answer is usually very little. Anything you would do to protect the portfolio has to have been done prior to the volatility, not in the middle of it. It’s worth noting most investors enter this period of market turbulence from a position of strength having earned returns above expectations the last several years. The typical Cornerstone client currently maintains an overweight to US stocks relative to international equities and a bias toward quality. Bond sleeves are well-diversified and alternative baskets are in place to provide a risk/return profile between equity and fixed income. Cornerstone will continue to monitor global events and constantly endeavor to have our clients properly positioned and prudently diversified to achieve their long-term objectives.
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