Despite lingering uncertainty, markets remained relatively quiet in April, with most assets and indices closing the period slightly positive. In hindsight, after a little more than a year of rate hikes and roller coaster rides for investors, the fact of the matter is that U.S. stocks and bonds are essentially at the same levels as they were this time last year. Now, a turning point seems to be looming as the Fed is visibly preparing to a call a time-out on rate hikes.
Looking at the last ten rate cycles, historical facts suggest that a period of economic stagnation could continue with the Fed on the sideline, with little immediate consequence for stocks and to the benefit of bonds. But once the time-out expires, the transition to rate cuts could, unfortunately, mark the beginning of a more pronounced deterioration in economic activity and, hopefully, a more sustained slowdown in inflation.
More specifically, three key scenarios appear conceivable in the Fed’s ongoing fight against inflation from here onwards: (1) a resounding victory, which equity markets seem to expect; (2) a hard-earned victory, discounted in part by bond markets, and (3) an overtime period, unlikely, but not impossible.
In any event, as investors, we never aspire to predict the turn of events with precision; no one can. Much simpler, our approach focuses on assessing whether macroeconomic conditions are conducive to risk assets’ outperformance, and with what degree of confidence. Now, virtually all indicators that we monitor are sending a cautious signal. The only exception is market momentum, which seems convinced there is no reason to be wary in the way that harkens back to the Summers of 2000 and 2007. The probability of a global economic slowdown has risen due to tightening credit conditions, which should lead to decreased spending and lower prices. The rate increases over the last year have a delayed impact so are still gradually impacting the economy and monetary policy decisions. That said, there is divergence between the negative tone of the news flow and the more constructive behaviour of markets. Ultimately, it is the latter that is important for investors.
Regardless of where we are in the market cycle, it continues to be paramount to take a disciplined approach to investing and remain focused on your long-term goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many investors do. The work we do of ongoing monitoring and reviewing of your portfolio also ensure it remains on track. With that being said, let's’ get to the numbers.
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