Ron Rough presents our April video market update and shares what FSA is doing to respond.
Stock Market Update Transcript
Hello, this is Ron Rough with a market update video for April. I thought first of all we’d talk a little bit about the first quarter. It was a great quarter really for stocks. You can see from this table you have the S&P up almost 11%, and so that was clearly the place to be, large cap U.S. stocks, and in particular, big technology companies. You can see it was a good quarter really for most everything. The Dow Jones, small caps all did well, foreign. Really, it was just high quality bonds that struggled, treasuries, because of persistent inflation and interest rates that are just staying elevated. That was really the only area that struggled in the first quarter. And then if you carry that to the next step, get under the surface of the S&P, you see sectors, while again it was dominated by technology, you can see communication services up there and technology. Also you had energy stocks, financial stocks, industrials doing well. So even though growth led the way in the quarter, value had some good participation as well. The only sector that was actually negative was real estate, which is no surprise given interest rates on the rise.
Now, what does it mean when you have a big quarter like that, the S&P up over 10%? Should we expect the market to give some of that back later in the year? What to expect? Well, Ned Davis did a study, and they went back all the way to 1930 and looked at years where the market was up over 10% in the first quarter. What did the rest of the year look like? And you can see from the numbers, on average, stocks continue to do pretty well up about 8%, 7-8%. So while the pace of gains certainly slows down for the rest of the year, or we should expect that, it would argue not to get defensive strictly because we had a big first quarter. And you can see there were only a couple of notable negative years, 1930, of course, right as the Great Depression was getting underway. And then also notably the crash of 1987 where we had a one-day crash in the market of 25% in one day. So those were the notable exceptions, otherwise, a pretty positive outcome. So no reason to be negative strictly, because we had a big first quarter.
Since we’re two weeks into April, let’s see where things look like now. You can see looking at the S&P 500 here, this chart goes back three years. And you can see we’ve already had a bit of a decline in April, only down 4% at this point when we’re recording this on the 18th of April, but certainly the most notable decline we’ve had since the market really took off in October. As we look at the world, we’ve broken the 50-day moving average, which is for us just waving a flag to say, “Hey, pay attention.” Stocks have pulled back some, but not serious enough for us to really react very much. You can see what a strong quarter it was. I drew a horizontal line marking the prior high, and this entire quarter has been basically new ground for the S&P 500. And so this is why the portfolios are fully invested and we’re primarily in large cap U.S. This is the healthiest looking area of the market.
If I show you the next chart, which is the value line, again, you can see it broke to a new high, but you just notice when you look at this chart, much choppier than the S&P 500. The value line index is looking at not only large companies, but also medium and smaller companies. And so what this tells you is that the average stock is not performing as well as the large leaders of the S&P 500. So again, this decline that we’ve seen here is actually a 6% decline in the value line so it is well through its 50. So for us, and I’m sure I’ve talked about this before, what we’d like to see in a truly healthy market is the average stock small cap stocks leading the large caps. And they are certainly not doing that. They are participating, so it’s not an unhealthy market, but it’s not a healthy market either.
The value line index was still up over 20% since the beginning of November, before this decline, of course, so they definitely participated in this rally we’ve had since November but just not quite able to keep up with the S&P and on the way down, they’re leading on the way down.
Now if we move on and look at bonds, these do look a little less healthy. You can see we’ve been in a downturn, although we did have a nice rally at the end of the year as we did in a lot of areas of the market. But this year you can see there’s just been this steady bleed downward in bonds. And this is why in our portfolios we have no exposure to high quality, fixed income securities, anything that’s tied to interest rates. So treasuries, high quality corporates, all of that is out of our portfolios right now.
There are some areas of the bond market that are actually doing relatively well. Floating rates, for example. So there are places to go, but it’s not in this area.
Now what would we do if things continue to weaken for stocks? And we’re not making any forecast of that, but here’s an area that I show for you folks basically as an area that might be interesting for us to delve into as this year progresses. And this is commodities. So this again is looking back about three years. You can see what a great run they had a couple of years ago, 2021 into ’22, and for the past year and a half, they’ve really done nothing. But we’re just beginning to get a turn in commodities, not surprising since inflation’s continued to be persistent. So it’s not a complete surprise that this area’s doing well. And if inflation stays high, this might be an area that we start to get into some of the portfolios, probably the more aggressive portfolios to start with. But this is an area that even with a choppy stock market, an area that can actually continue to move into an uptrend. So this is one area that we’ll be looking at in the weeks and months ahead.
Final point I wanted to make for today is the chart you’re looking at here is three years of mortgage rates. So this is sort of the average level of a 30-year mortgage rate. And this is where obviously we’ve all been wringing our hands for the past few years. You can see mortgage rates down in that 3% range a few years ago. And then we got over 7% at one point, and now we’re back when this chart was done at the end of March, we’re just around 7%. And if you listen to the pundits on TV, everyone believes that rates need to come down again, they need to get down. And what I wanted to highlight is, again to take a longer-term perspective, this is the same chart, but it’s going back over 50 years. And the window we’re talking about is just this area over here to the far right. And so my question to you is, where do you think the normal level of mortgage rates would be? Is it back towards 2 or 3%, or is a more likely equilibrium area more in the 6-7% range?
My point being not to necessarily expect rates to come down as much as I think a lot of people want rates to come down. If rates are falling, that’s a tailwind for stocks. So people are cheerleading for lower rates, I think in an effort for stocks to continue to move higher. But I’m not sure that charts like this would support the reality of a big drop in rates. Certainly as long as we’re not in recession. If we go into recession, it’s certainly a possibility that rates could come back towards the lows that we saw a few years ago. But as long as the economy holds in there, I’m not sure I would expect that.
So if that were to play out where rates don’t come down very much, then I would expect stocks to continue to struggle. Not necessarily fall, but to struggle. And I think that bonds also will be a pretty lackluster place to be. So it could argue for kind of a choppy and wishy-washy period for the second half of this year. But we’ll see what happens and we’ll always stay on top of everything and make the changes that are needed.
So thank you for listening, and until next time, we’ll see you then.
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