Topic: Market Movement

Rising recession fears pushed U.S. stocks briefly into bear market territory last week, with the S&P 500’s decline from its all-time high reaching 20%. There is no official bear market designation on Wall Street, though some may count Friday’s intraday lows as confirmation of one. The Dow Jones is mired in an eight-week losing streak, the longest since 1923. Meanwhile, the S&P 500 has been down seven straight weeks, the worst run since 2001.

We recognize that these times may make investors uncomfortable. Jack Bogle, the founder of Vanguard, famously said, “Stay the course, don’t let these changes in the market, even the big ones [like the financial crisis] … change your mind — and never, never, never be in or out of the market. Always be in at a certain level.” When the market was experiencing wild fluctuations in 2016, the great Warren Buffet told investors, “Don’t watch the market closely. Try not to worry too much about it.”

Here are four ways to stay on track toward achieving your goals while avoiding the common pitfalls investors experience during turbulent times:

Remember that this, too, shall pass. 

Declines have been common occurrences and, on average, have not lasted a long time. Investors who realize that declines are inevitable and temporary have avoided the imprudent behavior of selling out of the market during down times. The market has always recovered from declines (although past results don’t guarantee future results). The chart below puts into context the frequency and duration of previous declines.

Keep your focus on the future. 

It is important to maintain proper perspective; don’t place too much emphasis on recent events or disregard long-term realities. Long-term investors have been rewarded: The chart below shows that going back to 1937, the 10-year average return of the S&P 500 is 10.57%. That doesn’t mean that there haven’t been periods of time with below-average returns, but staying invested through those times has paid off for the long-term investor.

Don’t try to time the market.

If you sell now and hope to get back into the market if it goes down further, you could miss out on gains when stocks recover. As we have written before, the pain humans feel from losses is greater than the joy they feel from an equal gain. Every S&P 500 downturn of 15% or more has been followed by a recovery. As shown on the chart below, the average return following the five biggest market declines since 1929 has been 70.95%. Over the longer term, the average value of an investment more than doubled over the five years after each market low.

Don’t let emotions cloud your judgment.

As we often say, avoid the noise. Look past the headlines and stay focused on the longer-term goals. Don’t look at the market — or your account value — every day. During volatile times, look at the portfolio less often, knowing we are watching your portfolios very closely and continuing to make tweaks along the way. Investors tend to make poor decisions when they let their emotions take over.

So, what can we learn from all this? It is always difficult to see the value of your investments fall. During these challenging times, it is important to keep the following in mind:

• Ignore the noise of the sensational headlines.
• Selling into a panic is not an investment strategy.
• Market declines are a part of economic cycles.
• Don’t try to time the market, and do invest regularly, even when the market is falling.

It is likely that the current market drop may be a mere blip in the long-term investment plan. We are not going to try to time the market; what really matters is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns.

We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions, and remember that over a longer time horizon, markets tend to rise. Understanding that people fear losing money more than they enjoy making money is important during volatile markets. Investor emotions can have a big impact on retirement outcomes. 

Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Source: American Funds, CNBC

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The overall market sentiment feels very negative as the market has declined five consecutive weeks and began this week in similar fashion. Consumer confidence, a leading economic indicator, is negative. Market volatility remains elevated, as the VIX index closed at 35, more than double the historical value. Inflation is on everyone’s mind these days, especially at the grocery store or the gas pump. 

All market corrections feel similar: The sky is falling — how will the market ever come back or turn around? While we recognize that these times are painful from a portfolio perspective, we also realize that market corrections are healthy for the long-term performance of the market. It is important to remember that stock market downturns often are followed by a period of positive market performance. Since 1987, every major decline in U.S. equities has reversed itself between 21% and 68% within the following year, as seen in the chart below. And those who dollar-cost average in their portfolios — whether in taxable or tax-deferred accounts — have the potential to take advantage of the market recoveries by adding more monies into the portfolio.

Here’s another way of looking at the volatile nature of markets and corrections: The chart below shows intra-year declines over the 20-year period from 2002 to 2021, which includes the pandemic. A decline of at least 10% occurred in 10 out of 20 years (50% of the time), with an average pullback of 15%.* Despite these pullbacks, stocks rose in most years, with positive returns in all but three years and an average gain of 7%.

We want to share with you a few frequently asked questions that we are receiving during the market sell-off in hopes that they answer questions you may have:

I’m hearing a lot about I-bonds. What are they — and should we invest in them?

Series I Savings Bonds are a type of U.S. savings bond designed to protect the value of cash from inflation. Interest rates on I bonds are adjusted regularly to keep pace with inflation. Investors can purchase up to $10,000 of I bonds annually per person through the government’s Treasury Direct website. I bonds earn interest monthly, though you don’t get access to interest until you cash out the bond. You must own the bond for at least five years to receive all the interest that is due. You cannot sell the I bond before holding for one year. If you sell after one year and before the five-year holding requirement, you forfeit three months of interest that has been earned. These bonds have an actual maturity of 30 years. Keep in mind that these bonds cannot be purchased through our office and can only be purchased online through the Treasury Direct website.

Are there any changes to the portfolio that we need to make, and should we continue to purchase bonds?

As we communicate each week, we are constantly analyzing the market, the economy and the portfolios. To use the old hockey adage, we are skating to where the puck is going, not where it is. We are not going to make changes to the portfolio to time the market, but rather we are being strategic and thoughtful. We understand that market volatility is unsettling, but historically, this is not unusual.  The portfolios are diversified and invested per each client’s risk tolerance. 

We tweaked the fixed-income portion of the portfolio late last year to shorten the maturity and duration of the bonds. Bonds have had their worst start to the year in history, but we do not believe that it is in our clients’ best interest to abandon fixed income and move to cash or to increase risk tolerance and move to equities. While both stocks and bonds are down to start the year as inflation peaks and the Fed slows down interest rate hikes, we believe bonds will provide the necessary diversification and income to help the portfolio during market volatility. 

Bonds can be used for three primary purposes: income, capital preservation and equity diversification. As is the case with equities, being diversified within fixed income may help reduce portfolio risk. As always, we will communicate any portfolio changes as they occur.

Where does the market go from here?

Four main factors continue to be at play with this market: inflation, the war in the Ukraine, China and its continued lockdowns, and the Federal Reserve. Last week, the Fed raised rates by 50 basis points. Chairman Powell commented that the Fed is “strongly committed to restoring price stability” and that a 75-basis point hike is “not something the committee is actively considering.” Stocks are likely to remain volatile as the Fed pushes interest rates higher. 

The possibility of a recession later this year or next year remains in play, but strong earnings growth and record low unemployment are not recessionary indications. Remember that the stock market is a leading economic indicator, and often, the market sells off before the recession or the economic bottom of the cycle. By the time the economy feels worse, the stock market is already starting to recover. We do not know when the market will hit bottom, but we remain strong believers in the long-term fundamentals of the market.

So, what can we learn from all this?  Selling into a panic is not an investment strategy. Understanding that people fear losing money more than they enjoy making money is important during volatile markets. Investor emotions can have a big impact on retirement outcomes.

It is likely that this recent market drop may be a mere blip in the long-term investment plan. We are not going to try to time the market; what really matters is time in the market, not out of the market. That means staying the course and continuing to invest — even when the markets dip — to take advantage of potential market upturns.  

We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over a longer time horizon, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Blackrock, Forbes, Schwab
*As of Tuesday, May 10, the S&P 500 is down more than 15% year-to-date

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Over the last three years, the stock market has provided some valuable investment gains. So far in 2022, the market has given back some of those gains — and as a result, we have an opportunity to capture some investment losses. One of the nice aspects of the tax code is that if an investment is trading at a loss, you can sell the holding and reduce your taxable income. 

We recognize that an investor may have seller’s remorse in a down market, but capturing losses to offset current income taxes or future gains is a prudent portfolio management strategy. It is important to note that when you sell a holding for a loss, you do not want to replace that holding with a “substantially identical” investment either 30 days before or 30 days after the sale date, within the timeframe pictured below. Doing so would be a violation of the wash-sale rule.

What is the wash-sale rule?

When you sell an investment that has a loss in a taxable account, you may be eligible for a tax benefit. The wash-sale rule prevents investors from selling at a loss, then buying back the “substantially identical” investment within a 61-day window and being able to claim the tax benefit. This rule applies to stocks, bonds, mutual funds, exchange traded funds (ETFs) and options. 

The wash-sale rule states that the tax loss will be disallowed if you buy the same security or “substantially identical” security within 30 days before or after the date you sold the investment for a loss. This includes selling a holding for a loss in a taxable account and then buying it back in a tax-advantaged account. 

How can you avoid the wash-sale rule?

ETFs or mutual funds can be helpful in avoiding the wash-sale rule, especially if you are selling an individual stock for a loss. Swapping one ETF for another — or one mutual fund for another — can be tricky because of the “substantially identical” security rule. There are no clear guidelines on what constitutes a “substantially identical” security. If you sell one individual stock and then purchase another security, avoiding the wash-sale rule is much more straightforward. The IRS determines if your transactions violate the rule. If that does happen, you may end up paying more taxes than you anticipated.

You can avoid the wash-sale rule typically in the following ways:
   • Avoid buying the same or similar investment 30 days before and after the sale.
   • Invest in a materially different investment than the one you sold.
   • Have a long-term investment plan during market downturns to help you make the best investing decisions, and don’t sell into a panic and then repurchase.

Remember, you cannot sell an investment for a loss in one account and buy it back in another account, such as in an IRA or spouse’s account. This would disallow the loss to be used since the accounts are under the same ownership. As always, we recommend that you consult with a CPA if you have questions.

What is the penalty?

If the IRS determines that you have violated the wash-sale rule, you cannot use the loss on the sale to offset gains or reduce taxable income. The loss is then added to the cost basis of the new investment. The holding period is added to the holding period of the new investment. There may be a long-term benefit to the higher cost basis to reduce future taxes, and the holding period may help you qualify for long-term capital gains tax rather than short-term capital gains tax. In the short run, however, you are not able to use the loss that you were hoping to have when the investment was sold. 

So, what can we learn from all this? While no one wants to see their portfolio value decrease, rebalancing the portfolio (as we did recently) may create some tax losses that can be used to help offset future gains or current income. Tax loss harvesting is an important investment principle and one that we have written about in detail. When one sells a holding for a loss in a taxable account, a “substantially identical” holding cannot be purchased 30 days before or after the sale to avoid the wash-sale rule. It is important to consult your CPA with any questions on the wash-sale rule.

Market volatility can be unsettling, but for long-term investors, it is not unusual. It is likely that the recent market drop could be a mere blip in the long-term investment plan. We are not going to try to time the market; what really matters is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip. 

We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Remember, first and foremost, that panic is not an investing strategy. Neither are “get in” or “get out” — those are just gambling on moments in time. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over longer time horizons, markets tend to rise. Market corrections are normal, as almost nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Fidelity, Forbes, Kitces

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

U.S. stocks fell hard on Friday, extending a run of three consecutive down weeks in the market. The selling continued to begin the week as investors reacted to disappointing earnings results from Netflix and other companies, the Federal Reserve’s increasingly aggressive talk about interest rate increases, the war in Ukraine and further lockdowns in China. With its drop on Friday, the S&P 500 is down more than 10% on the year and back in correction mode. Market volatility, as measured by the VIX index, has increased as the Fed’s plans to tackle inflation have evolved. We are likely to see continued spikes in the VIX index, given the uncertainty in the current economic environment.

Last week, Fed Chairman Jerome Powell suggested that the central bank may be envisioning a quicker series of interest rate hikes than previously expected. Markets are bracing for a half-point increase in May, with more tightening ahead. The chart below provides a historical perspective of 10-year Treasury yields since 1980; we are a long way from the interest rates many remember from the early ’80s. David Hoag, the portfolio manager of Bond Fund of America said this week, “Central banks will do what they need to do to get inflation under control, but I don’t think that they will be able to go too far before the real economy starts hurting.” What he is implying is that the Fed is not likely to raise the federal funds target rate anywhere near the long-term historical average of 5% (today, we are in a range between .25% and .50%).

Free fall: Interest rates have plummeted in the era of easy money

Central Banks around the world are likely to join the U.S. Federal Reserve Bank in trying to get inflation under control. The strong global economy, war in Ukraine and supply chain disruptions continue to put upward pressure on prices. Most investors follow the stock market more than the bond market. As we recently wrote, the bond market has had a rough start to the year. The chart below shows that the bond aggregate index is down more than 10% through Friday. Rate-hike expectations have pushed bond yields higher, with 2-year Treasury yields up almost 2% on the year and 10-year Treasury yields up by almost 1.5%. We believe the bond market is pricing in most of the expected tightening. The good news: Higher yields create potential opportunities for fixed-income investors, who can earn better yields and returns than we have seen in the last three years.

Over long periods of time, markets have tended to adjust to rising rates. During the last 10 periods of rising interest rates, the S&P 500 has posted an average return of 7.7%. Bonds have also held up well during the same time, with an average return of 3.9% during seven rate-hiking cycles dating back to 1983. Of course, the usual caveat remains: Past results are not predictive of future returns, as each market cycle is different.

Despite the uncertainties, plenty of reasons for optimism remain, and these are several to watch:

• NATO is unified against Russia, and the Macron victory in France is a big statement for unification.
• Russia is bogging down in Ukraine and struggling to win the war.
• Individual tax revenues are up by almost 35% this year compared to 2021. 
• The deficit appears to be shrinking at a fast pace and could end the year at $1 trillion, compared to $2.77 trillion in 2021.
• The Supply Management Purchasing Managers Index, a reliable predictor of growth across the economy, has retreated from its post-COVID peak but remains at levels that signal growth ahead.
• The labor market remains tight and is beginning to draw older Americans who quit or retired during the pandemic back into the workforce.
• Profit margins for S&P 500 companies stood at record levels at the end of 2021.

So, what can we learn from all this? Market volatility can be unsettling, but for long-term investors, it is not unusual. The recent market drop is likely to be a mere blip in the long-term investment plan. We are not going to try to time the market; what really matters is time in the market, not out of the market. That means it is important to stay the course and continue to invest, even when the markets dip. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Remember first and foremost that panic is not an investing strategy. Neither are “get in” or “get out” — those are just gambling on moments in time. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over a longer time horizons, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources:  Bloomberg, Capital Group, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Bonds are selling off around the world, and the Global Bond Aggregate index is down more than 10% since its peak in January, its worst drawdown on record. The bond market is flashing a warning sign that has correctly predicted almost every recession over the past 60 years: an inversion of the U.S. Treasury yield curve. 

The existence of an inverted yield curve is a signal that investors are more nervous about the immediate future than the longer-term outlook. An inversion if the yield curve has preceded every recession since 1955, but in and of itself, the inversion does not guarantee a recession will occur.

The most closely watched part of the curve is the 2-year Treasury compared to the 10-year Treasury. On Tuesday, the 2- and 10-year yield curve inverted for the first time since 2019 after starting the year at a spread of 79 basis points between the two. The 5-year Treasury bond and the 30-year Treasury bond inverted on Monday for the first time since 2006.

What is the yield curve?

A yield curve is a line that plots interest rates (yields) of bonds with equal credit quality but different maturity dates. There are three main shapes of a yield curve: normal (upward sloping), inverted (downward sloping) and flat. A normal yield curve, or upward sloping, is indicative of economic expansion, while an inverted yield curve points to an economic recession. 

With a normal yield curve, longer-maturity bonds have a higher yield compared to shorter-term bonds. For example, in a normal yield curve, a 2-year bond could yield 1%, a 5-year bond could yield 2% and a 10-year bond could yield 2.5%. The farther out one goes on the curve, the higher the yield. Conversely, an inverted yield curve slopes down, meaning that short-term interest rates are higher than longer-term interest rates. When the return of a 10-year bond is lower than that of a 2-year bond, for example, signs point to investors carrying a pessimistic outlook and a reluctance to commit money to longer-term maturities. 

Why does an inversion in the yield curve matter?

The yield curve is one of a handful of leading economic indicators that are considered reliable gauges of turning points in business cycles. Yield curve inversions are often viewed as a cause of a recession, but really, they are symptomatic of the conditions that lead to an economic recession.

An inversion in the yield curve generally indicates a recession is coming, most often within six months to two years. It does not mean that stocks are about to sell off; historically, the stock market has not peaked until months after the inversion, as seen in the chart below.

The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The chart below lists the components of Leading Economic Index as well as Coincident Economic Index (CEI). NBER primarily monitors the CEI for recession indicators, but these provide a retroactive assessment and don’t tell us much about where we are headed. The unemployment rate is another lagging indicator; unemployment rates always have been near historic lows heading into recessions. 

The chart also looks at the current level of 10 different leading economic indicators as well as the trends for each indicator. Consumer confidence has been waning as inflation runs high and the war in Ukraine continues into its second month. The S&P 500 trend is moving towards stabilization after the recent March lows, and the other leading economic indicators remain stable for now.

As the Fed continues to raise rates and investors anticipate tighter financial conditions, we will continue to watch the yield curve and other recessionary signals to determine how they may impact the stock market and your portfolios. While the Fed has finally announced it will raise rates to combat inflation, rates remain low by historical standards. The key message from the Fed is that it is focused on fighting inflation and is prepared to hike short-term interest rates steadily while reducing the balance sheet to attain its goals.  

So, what can we learn from all this? This week, we saw the yield curve invert for the first time since 2019, but remember: A recession is not a foregone conclusion. Every recession has been preceded by a yield-curve inversion, but not every inversion of the yield curve has led to a recession. Furthermore, even if a recession occurs in the next six months to two years, the stock market may continue to experience positive returns.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Panic is not an investing strategy. Neither are “get in” or “get out” — those are just gambling on moments in time. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions; over a longer time horizon, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: CNBC, CNN, Schwab, Investopedia, iCapital

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The S&P 500 saw its biggest weekly gain since 2020 last week. The Federal Reserve announced the first interest rate hike since 2018, a 25-basis point increase in its target range for the federal funds rate, to a range of .25% to .50%. The fed-funds rate is an overnight rate on lending between banks that influences other consumer and business borrowing costs through the economy, including rates on mortgages, credit cards, savings accounts, car loans and corporate debt. Raising rates typically restrains spending, while cutting rates encourages borrowing.

Fed Chair Jerome Powell had signaled that a rate hike was coming, and the market was focused on the Fed’s guidance on the outlook for the economy, inflation and the future path of policy rates. In an effort to slow inflation, the Fed has penciled in six more increases by year end, the most aggressive pace in more than 15 years. The committee also sees three more rate hikes in 2023, with short-term rates ultimately between 2.5% and 3%. 

The Fed’s economic projections are painting a scenario of a soft landing for the economy: inflation retreating while unemployment stays low and economic growth slows to a more long-term sustainable growth rate of 2% to 2.5%. The Fed is normalizing its policy as the economy no longer needs the pandemic-induced stimulus, and it also signaled that it would start reducing its balance sheet, marking the start of quantitative tightening.

Fed officials face three important questions as they consider their next moves:
• How quickly will it need to raise rates to a “neutral” level?
• Has the “neutral” level increased as rising inflation sends down borrowing costs?
• When will the Fed need to raise rates above neutral to deliberately slow growth?

Powell signaled greater concern that higher inflation might persist due to a hot job market with record job openings and wages increasing at their fastest pace in years. The central bank ended a long-running asset purchase stimulus program last week. Fed officials are facing the prospect of even higher inflation due to escalating sanctions by the West against Russia risking higher energy and commodity prices, combined with the new pandemic lockdowns in China further harming global supply chains.

Here are some of the effects we anticipate as the Fed embarks on raising rates:

Mortgages: While the federal funds rate doesn’t directly impact mortgage rates, they often move in the same manner. Despite mortgage rates moving higher, the current environment is still attractive if you’re looking to get a new mortgage or refinance your existing one.

Home Equity Line of Credit (HELOC): Typically linked to prime rate, the costs of a HELOC will move higher as the Fed raises rates. Those with HELOCs should expect to see their payments continue to rise in the near term.

Savings accounts and CDs: Rising interest rates mean that banks will offer higher returns on their savings and money market rates. It may take time for banks to raise rates to the level of current fed funds rates; banks normally act quicker in cutting rates.

Equity markets: The stock market has been a big beneficiary of the Fed’s willingness to keep rates low. In the last few months, the market has been pricing in higher interest rates. The S&P 500 has historically delivered positive returns over the past six Fed hiking cycles, averaging a 9.5% annualized return, as seen in the chart below.

S&P 500 Annualized Total Return During Previous Fed Hiking Cycles (%)

So, what can we learn from all this? While the Fed has finally announced that it will raise rates to combat inflation, rates remain low by historical standards. The key message from the Fed is that it is focused on fighting inflation and is prepared to hike short-term interest rates steadily while reducing the balance sheet to attain its goals.  

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Remember, first and foremost, that panic is not an investing strategy. Neither are “get in” or “get out” — those are just gambling on moments in time. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions, and remember that over a longer time horizon, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: CNBC, Goldman Sachs

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Though the immediate economic impact of Russia invading Ukraine has been in the energy markets, sanctions placed on Russian banking and payment systems are causing increased volatility in global currency markets as well. As the war enters its third week, the Russian stock market was down more than 63% year-to-date before being closed this week, and the ruble hit a record low against the dollar. Global markets are suggesting that Russian debt is at a very high level of default.

You may recall that Russia previously defaulted on its debt in 1998, when it was reeling from the Asian Financial Crisis of 1997 and oil prices trading in the low $20s per barrel. This sent shockwaves through the global markets, culminating with the collapse and liquidation of the hedge fund Long-Term Capital Market. The International Monetary Fund (IMF) stepped in with a rescue package at a time when no government or company was sanctioning the Russian economy. It is difficult to imagine the IMF or other governments (outside of China) stepping in to rescue Russia if it were to default today.

What does the war mean for U.S. investors?

Russia’s invasion of Ukraine adds to the uncertainty that has weighed on stocks since the start of the year. History tells us stocks tend to be more volatile during periods of uncertainty, and while volatility is elevated at the moment, the VIX index remains well below levels seen during the height of the global pandemic or global financial crisis.

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VIX Index, a measure of volatility in the equity market

Russia is the world’s second-largest producer of natural gas and third-largest producer of oil, accounting for 11% of global oil supply in 2021. The risk of a significant cut to the global oil supply has sent oil prices sharply higher. Russia and Ukraine also account for more than a quarter of the world’s wheat exports; we recently have seen higher food and commodity prices as well. 

Higher energy and food prices complicate the Federal Reserve’s efforts to handle inflation and rising rates. Higher oil and commodity prices may dampen consumer spending on discretionary items, and therefore, may help to cool economic activity — which takes pressure off the central bank to raise rates quickly. 

As the chart below shows, stocks have largely shrugged off past geopolitical conflicts. As we often say, the most important factors in stock performance are market fundamentals and the fundamentals of underlying companies. 

“Over the last few years, markets have been conditioned not to overact to political and geopolitical shocks,” said Mohamed Aly El-Erian, chief economic advisor at Allianz. For a longer-term perspective, notice the chart below that outlines global conflict and crises going back to World War II. If the red dots and lines outlining the geopolitical events were not visible, one analyzing the chart would not make a rational conclusion to sell based on a war. The chart shows a clear trend of positive returns over the long term.

We know that in the context of geopolitical risks, equity markets always have been resilient. The ups and downs triggered by the Russian invasion suggest that we will continue to have increased volatility, but no one knows for sure how long that volatility may last. We expect that the markets will work this out and reach new heights over time. We also expect that along the way, markets will experience sharp declines — much like we are seeing today.  

So, what can we learn from all this? Regardless of how the Russia-Ukraine war unfolds, the stock market is driven primarily by U.S. business activity. Although inflation in prices for oil, food and commodities is cause for concern, it remains important to make investment decisions based on logic, not emotions.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator.

In markets and moments like these, it is essential to stick to the financial plan.

Panic is not an investing strategy. Neither are “get in” or “get out” — those sentiments are just gambling on moments. Investing is a disciplined process, done over time. At the end of the day, investors will be well served to remove emotion from their investment decisions and to remember that over the long term, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. 

The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: FactSet, Forbes, LPL Financial, Kestra Financial, Ritholtz, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.