Stocks and Bonds Both Selloff During April

Monthly Client Letter
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Monthly Market Summary

  • The S&P 500 Index produced a -8.8% total return during April, outperforming the Russell 2000 Index’s -9.9% total return.

  • Consumer Staples was the only S&P 500 sector to produce a positive return during April’s market selloff. The Energy sector was the second-best performing sector as the price of crude oil traded at around $100 per barrel. In contrast, the ‘Growth-style’ sectors, including Communication Services, Consumer Discretionary, and Technology, each traded more than -10% lower as interest rates soared higher.

  • Corporate investment-grade bonds generated a -6.7% total return, underperforming corporate high yield bonds’ -4.2% total return.

  • The MSCI EAFE Index of global developed market stocks returned -6.7% during April, underperforming the MSCI Emerging Market Index’s -6.1% return.

Federal Reserve Policy Remains a Headwind for Equity & Credit Markets

April was another difficult month for both the stock and bond markets. The S&P 500 Index traded -8.8% lower during the month, while the Bloomberg Bond U.S. Aggregate Index traded -3.8% lower. Low-interest rates and bond purchases stabilized the U.S. economy during the Covid pandemic, but removing the two pandemic-era monetary policies proved enormously disruptive. Federal Reserve policy remains the driving force as the central bank raises interest rates and prepares to shrink its balance sheet to ease inflation pressure. It is a delicate and challenging balancing act to pull off.

US Style Returns YTD for 2022

US Style Returns (YTD in %). Source: MarketDesk Research

Interest rates rose again during April as the 10-year U.S. Treasury yield surged +0.57% to 2.89%. While 0.57% may seem small on an absolute level, it significantly impacts how investors position portfolios.

Why?

Interest rates represent the cost of money and are used as an input to value company shares. A higher Treasury yield offers investors a higher rate of return. The expected return must increase to incentivize investors to own riskier assets, such as stocks. Buying an asset, such as a house or stock, at a lower valuation should increase the expected return, which means the theoretical value of the asset should be lower as rates rise. This period of rate hikes is the reason for the market's chaotic valuation process. It is trying to find the correct theoretical fair value of a company's shares as interest rates rise. The rate hikes also deal with geopolitical tensions, new Covid lockdowns in China, and surging inflation.

What Can You Expect Moving Forward?

There is no easy answer or definitive path forward. This year’s selloff indicates some degree of tighter Federal Reserve policy is already priced into the market – we just do not know how much. In addition, the list of market uncertainties remains long, including corporate earnings quality, economic strength, and the path of Federal Reserve interest rate hikes. Until the market clarifies these uncertainties, volatility will likely remain elevated. The bumpy ride may not be done yet.

Our Insights

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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