After a disappointing April, investors waited for the release of the notes from the Federal Reserve meeting on May 4th. At 2:00 pm on Wednesday the announcement came that the Board voted to raise short term interest rates 0.5%. This was widely expected, and the market soared after the news release. The indexes all made up for some of April’s losses, only to give back those gains on Thursday. The choppy back and forth action continues like a tug of war between buyers and sellers.
It has been a rough year. The S&P 500 closed the month of April down -13.3% year to date. The Dow is down -9.25% and the Nasdaq, which has struggled for over a year, closed in April down -21.16% for the year. In April, the Dow and the S&P saw the most selling since the pandemic crash two years ago. The Nasdaq had the worst month since 2008.
The challenges we have discussed for months still remain. Rising inflation, rising interest rates, fear of a recession, the unknowns involving Russia’s war in Ukraine, and Covid resurgence all weigh heavily on the market.
Data released on April 12 confirmed that inflation is worsening. The twelve months ending in March showed an increase of 8.5%. This is the highest inflation rate reported since December of 1981 and up from February which was 7.9%. The Federal Reserve has its work cut out for it and many think it is behind the curve. It waited too long to address this issue and now it must play catch-up.
A big April surprise came when the initial estimate of GDP for the first quarter of 2022 was released by the Bureau of Economic Analysis. Analysts were expecting a slow down from the block buster fourth quarter of 2021 - a robust +6.9%, but no one was anticipating the negative 1.4% which was reported in April. This only heightens concern of a recession which is defined as two back-to-back negative quarters.
Investor sentiment is deep in the fear category. It may surprise some to know that confidence readings this low are typically a bullish indicator. Warren Buffett says, “Be fearful when others are greedy and be greedy when others are fearful.” This could be one of those times not to follow the crowd.
Rather than panic, we look at the big picture. We know we are facing rising interest rates, so we focus on the areas of the market that do better when interest rates are higher. We look for sectors that historically outperform in inflationary times, energy, commodities, materials, insurers. We sell laggards – stocks that are not keeping up - and that raises cash to provide a cushion against falling prices and the cash is ready for opportunities when they present.
In this environment it is important to stay focused and follow a plan. Don’t let fear rule. Investment decisions made based on emotions usually do not end well. It is important to have a plan of what to do when the market goes against us. If you would like to discuss your account, please call us.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.