Vanguard’s monthly economic and market update.
Vanguard’s monthly economic and market update.
The American economy is healthy again and appears to be on a path toward solid growth in 2022, which should be encouraging news for U.S. financial markets.
Yet investors can be forgiven for feeling extremely uncertain about the year ahead, according to U.S. economist Darrell Spence.
“We’re far enough along with the pandemic that the economy is not in distress,” Spence says, “but COVID and the response to it created a number of distortions — in global supply chains, labor markets, sectors and even politics.”
He expects U.S. economic growth to be solid but slowing in 2022, in the range of 2.5% to 3.0%, as the economy contends with waning stimulus and inflationary headwinds. Although full economic shutdowns may be behind us, emerging COVID variants, including Omicron, and other surprises could further dampen growth.
“Things are returning to normal, but none of us has experienced this before. It’s important to acknowledge there are still things we don’t know,” Spence adds.
Perhaps the biggest questions on investors’ minds are about inflation. How high will it go and how long will it last?
Neither investors nor Federal Reserve officials have had to contend with meaningful inflation over the past three decades. That changed last summer.
“When stimulus-induced demand met COVID-restricted supply it created distortions in the economy,” Spence says. “And that fueled rapidly rising prices wherever there were bottlenecks.”
Fed officials have maintained that high inflation levels in the U.S. are transitory, and prices should retreat once these distortions are corrected. But Spence expects inflation levels will remain elevated throughout 2022.
“I’m not convinced that these shifts are fundamental changes to the productive capacity of the economy, so I expect inflation to moderate. But it may take longer than Fed officials expect for supply and demand to come back into balance.”
Investors worried about the destructive impact of inflation on their portfolios should consider this: Even during times of higher inflation, stocks and bonds have generally provided solid returns. It’s mostly at the extremes — when inflation is above 6% or negative — that financial assets have tended to struggle.
What’s more, some inflation can be healthy for companies, such as banks and commodity-linked companies that have struggled in a low inflation, low interest rate world.
Inflation is so unsettling because it can erode a company’s profits and, ultimately, investor returns.
To blunt its impact, investors may want to consider investing in companies with pricing power. Pricing power can help protect a company’s profit margins by passing rising costs along to customers.
“I’m not ready to believe we are headed into a period of sustained inflation,” says equity portfolio manager Diana Wagner. “But I do believe rising costs will linger in the months ahead, making it the biggest risk investors face in 2022. That’s why I am so focused on uncovering companies with pricing power.”
Take Netflix. A string of hits like “Squid Game” and seemingly insatiable viewer demand have enabled the streaming giant to raise subscription fees four times over the past 10 years.
High and stable margins can be an indication of pricing power. Companies with pricing power potential include consumer businesses with strong brand recognition, like beverage makers Keurig Dr Pepper and Coca-Cola; companies in industries with favorable supply and demand dynamics, like semiconductor and chip equipment makers TSMC (Taiwan Semiconductor Manufacturing Company) and ASML; and businesses that provide essential services, like health care giants Pfizer and UnitedHealth Group.
Consumer goods aren’t the only things that appear to be expensive. Thanks to low interest rates, accommodative central bank policy and the reopening of economies, most classes of stocks and bonds have gotten pricey.
U.S. equity markets have been generally strong in the post-pandemic period, thanks in part to robust corporate earnings. That said, price-to-earnings ratios, a measure of how expensive stocks are, have been elevated relative to historical averages.
That’s why careful security selection and diversification are more important than ever.
“We have seen a range of stocks — from fast-growing digital stocks to old economy stocks tied to the cyclical recovery — become more expensive over the past year,” says equity portfolio manager Chris Buchbinder.
“Given the level of uncertainty we face today, I am looking to strike a balance in my portfolios, seeking exposure to companies with long-term growth potential, like certain giants in e-commerce, streaming and digital payments; companies that can still participate in the cyclical recovery, like airplane engine manufacturers; and those with secular growth and cyclical components, like automaker General Motors — whose Cruise division is a leader in driverless car technology.”
One potential bright spot for investors in 2022 is the universe of dividend-paying stocks.
After record dividend cuts and suspensions during the pandemic, companies are reinstating dividend payments, and some with surplus capital are declaring catch-up dividends.
“Today I am finding no shortage of opportunities to invest in companies restoring and even increasing dividend payments,” Wagner says. “With profit margins recently near peak levels, companies are able to increase dividends despite inflationary pressures.”
Of course, not all dividend payers are created equal. Wagner is focusing not on the highest yielders, but on those companies with strong underlying earnings growth that have demonstrated a capacity and commitment to raise dividends over time. Consider, for example, semiconductor makers like Broadcom, which has increased its annual dividend in each of the last five years. Even during the pandemic, the company raised its dividend more than 11%, supported by record profitability. Such dividend growers historically have tended to generate greater returns than other dividend strategies, while also keeping up relatively well with the broader market.
Companies paying meaningful and growing dividends can be found across a range of sectors. Among these are health care services providers like UnitedHealth Group and telecommunications conglomerates like Comcast.
While it might feel like a lifetime away, investors may want to be mindful of the midterm elections in November. Historically, elections have little impact on the long-term direction of markets, but they tend to cause some volatility during election years.
“I don’t think this year will be any different,” Buchbinder says. “I don’t expect the result to be a huge driver of investment outcomes one way or the other. There may be a few bumps in the road, and investors should brace for short-term volatility throughout the year.”
Indeed, an analysis of more than 90 years of equity returns reveals that stocks tend to have lower average returns and higher volatility for the first several months of midterm election years. As results at the polls become more predictable, this trend often reverses, and markets have tended to return to their normal upward trajectory. But these are just averages, so investors shouldn’t try to time an entry point into the market.
With a laundry list of concerns including slower growth and rising inflation, many investors may be wondering if they should move some cash to the sidelines in 2022. Holding a lot of cash has typically been a drag on overall portfolio returns, and it may be especially impactful today since real returns from cash are negative.
Instead, investors should consider maintaining a well-diversified, balanced portfolio like the one in the chart below.
The chart illustrates a hypothetical scenario representing three types of investors. Each year, a momentum-driven investor buys the top returning asset class from the previous year. A value-seeking investor buys the lowest returning asset class. The third investor sticks to a 60/40 balance between diversified stock and bond portfolios and rebalances at year-end. In nearly every multi-year holding period over the last 20 years, the balanced portfolio outpaced the other two, often by a wide margin.
Within their equity portfolios, investors may want to include a mix of proven growth companies, stocks that have consistently increased dividends and companies that can maintain pricing power.
“With rising inflation and other uncertainties on the horizon, I’m optimistic that an active portfolio of select companies with strong pricing power can help investors thrive in the years ahead,” Wagner says.
The US Federal Reserve (Fed)’s message on inflation has changed. Fed
Chairman Jerome Powell recently characterized supply-chain bottlenecks
and disruptions as “frustrating” and as “holding up inflation longer than we
had thought.” The Fed’s mea culpa is small consolation for investors whose
portfolios haven’t been positioned optimally for a longer-than-expected
period of higher inflation.
I previously said inflation would likely be stickier than the market or the
Fed anticipated. The question now is: Has inflation already peaked? In my
opinion, the short answer is no.
Inflation is being pushed higher by three catalysts—labor, raw materials,
and transportation—that are interrelated in ways that create longer-lasting
systemic risks for the economy. I use the term systemic because of the
parallel to systemic financial risks, in which stress in one area of the market
spills over into other parts of the financial system, amplifying the initial
For example, the CEO of a computer hardware company recently told our
analysts that it wasn’t just semiconductors that were in short supply, but
also plastic, resin, copper, and steel. Then once the hardware is built, it’s
transported on container ships that are backed up at US ports. Finally, a
scarcity of truck drivers and port workers means that getting the finished
products to stores is delayed.
Thus, while some supply-chain strains may ease relatively soon, the ongoing
bottlenecks could take at least another year to resolve.
The pandemic’s path remains the key to the economic outlook, and what
we’ve learned about it since last quarter is concerning: Additional variants
are possible (and potentially more transmissible and virulent), vaccine
protection could wane over time, and a significant percentage of the
population may remain unvaccinated. This new reality is reflected in reduced
economic activity (FIGURE 1), the resurgence of growth stocks over value
(as measured by Russell 1000 Growth Index1 vs. Russell 1000 Value Index2),
and a return to record lows in long-maturity yields. On a more positive note,
growth is still strong, economies are unlikely to go back into lockdown, and
stimulus remains supportive. All of this leaves markets caught between two
narratives: The pace of growth seems poised to slow, but the level of growth
is likely to remain above par.
Against this backdrop, we continue to seek a pro-risk stance over the next
6−12 months, preferring equities to bonds. But relative to last quarter, our
optimism is tempered somewhat by a slight downgrade to our macro and
policy outlook—including the potential for modestly slower growth, a slight
reduction in policy support, and inflation that’s more persistent than the
market expects. Within equities, we prefer Europe, which we continue to
believe is on the cusp of economic outperformance, and we have reduced
our emerging market (EM) view to neutral given the high costs of COVID19, high inflation,
and political volatility. We remain moderately bearish on
government bonds in Europe in particular, as yields seem too low given our
macro forecast. Credit spreads3 are generally rich, but we find some value in
bank loans and EM debt.
We have been advocating value-oriented exposure from a sector, market-cap,
and regional perspective. However, given the slightly less favorable fundamental
and policy backdrop, we think asset allocators should be more balanced between
growth and value. We continue to think commodities are supported by our inflation
outlook, and we favor energy and industrial metals, which have historically been
more sensitive to rising inflation than equities and can potentially help hedge
against a rise in interest rates.
We are moderately bullish on European equities due to attractive valuations, the
sharp increase in vaccinations, and high savings levels, which should allow for
more robust spending if consumer confidence increases as we expect. We are also
optimistic that Germany’s elections this fall could lead to a more supportive fiscal
environment and one that may influence the broader European stance. While
Europe has evaded the Delta variant’s wrath better than the US thanks to higher
vaccination rates, we are wary of the variant’s unpredictability and the potential
for further spread on the continent.
We’ve downgraded our view on EM equities to neutral as many countries are
experiencing expanding fiscal deficits and high inflation, and central-bank rate
hikes could slow domestic economies. Pockets of value persist among commodity
exporters and countries less dependent on tourism, but differentiation is key. We
would be selective in China given potential weakness in the cycle and uncertainty
related to the government’s regulatory push and deleveraging in the property
industry (FIGURE 2). Within Asia, we are neutral on Japanese equities. We see
tailwinds from cheap valuations and Prime Minister Suga’s resignation, which should
bode well for the business-friendly Liberal Democratic Party. But we are concerned
about China’s slowdown, which may feed through to the broader region.
We maintain a neutral view on the US. We think the US economy will slow somewhat
but stay strong, and consumers are in great shape. While policy support is slowly
declining, it remains highly supportive. Indeed, the Federal Reserve (Fed) seems
convinced that inflation expectations will remain anchored at low levels even as it
keeps its foot on the stimulus pedal. Our view is that inflation could be more
persistent than expected, given challenging supply shortages, rising wages, and
a hot housing market, which tends to lead to sticky shelter inflation. Higher, more
persistent inflation could unsettle equity markets, and valuations are expensive.
Thus, we prefer a quality bias and a balance between growth and value.
We are bullish on commodities given the inflation dynamics discussed, as well
as supply/demand imbalances across energy, metals, and agriculture. Capital
expenditures have been very weak for the past decade following a free-spending
period focused on growth rather than profitability. More structurally, environmental
concerns are feeding into higher costs and potentially lower supply. Our research
shows that commodities have historically been the only asset with a materially
positive beta4 to inflation, so from a portfolio-construction standpoint, we see a
case for at least some commodities exposure.
We agree with market consensus that the Fed may likely begin tapering around
year end. We see the European Central Bank (ECB) as more hawkish relative to the
nominal growth picture in its economy, and we think sovereign rates in Europe are
likely to drift upward. In credit, valuations are rich, with most spreads well inside of
median levels. However, defaults are likely to stay very low, and demand technicals
are strong as demographics and pensions generate huge demand for yield.
Within credit, we prefer EM debt to US high yield as EM spreads are considerably
wider (FIGURE 3). Credit valuations have been a reliable indicator of forward excess
returns—a dynamic we continue to trust. We think Mexico, Russia, and EM countries
in Central and Eastern Europe are attractive. We also prefer bank loans, which offer
attractive valuations vs. US high yield and could benefit from the Fed beginning to
We find securitized credit attractive relative to investment-grade corporates from
a valuation and risk perspective, given the abundance of asset types. We continue
to favor US residential housing, where millennials should be a growing tailwind for
demand. Securitized credit also offers floating-rate structures, which are appealing
from a duration5 perspective. The updated risk factors adopted by the National
Association of Insurance Commissioners may increase demand for AAA- and
Our base case is that central banks have clearly communicated their intentions to
taper slowly, but a policy mistake remains a risk given the amount of liquidity in
the system and its importance to markets. Bumps could occur if the Fed or ECB are
perceived to be too hawkish, or if their plans don’t change quickly enough in the
face of a new variant or other COVID surprise.
COVID remains the boogeyman. Its impact on consumer preferences (more saving/
less spending) could last longer than expected. And with more than five billion
people unvaccinated worldwide, the potential for new, more dangerous variants
requires investors to stay nimble and monitor portfolio risks carefully.
In addition, China’s opaque system is difficult to analyze, and government priorities
aren’t easy to infer. Although not our base case, China’s renewed focus on
socializing wealth via regulations could continue or even increase. China’s housing
market and debt levels are also concerns, as highlighted by Evergrande’s recent
On the upside, two major market drivers, the Delta variant and China’s regulatory
approach, could both ease in the coming months. EMs could benefit if China’s
policymakers temper their tightening of the property market, boost infrastructure
spending, and loosen climate controls—moves that could be spurred by politics
ahead of the National Congress in November 2022.
Markets may also be positively surprised by the patience of central banks and find
themselves awash in liquidity for several more quarters to come. Interest rates may
stay low for an extended period, despite the economic recovery, and risk assets6
could appreciate further.
Finally, our inflation concerns may be ameliorated by a pickup in productivity,
something that many economic models predict and that could be boosted by
government spending on traditional and technological infrastructure after many
years of underinvestment.
Achieving a net zero economy means drastically reducing emissions by 2050, with the goal of limiting temperature increases to 1.5°C above pre-industrial levels. In order to have a 50% probability of meeting that goal, the world must achieve net zero carbon dioxide emissions by 2050 and net zero emissions of all other greenhouse gases by approximately 2070. Limiting global warming to 1.5°C is the higher aim of the Paris Agreement and is necessary in order to mitigate the most severe long-term economic consequences of climate change. Reaching net zero requires a complete transformation of the global economy. To get there, we need to replace fossil fuels as the economy’s primary energy source, which provide 84% of the world’s energy, with low carbon sources such as wind and solar.
“Temperature alignment” reflects how closely aligned a business, government, or portfolio is to a 2050 net zero economy. Temperature alignment is a forward-looking measurement. In other words, it is measured by looking at emissions today as well as the potential of the emitter to reduce their emissions. In order to measure temperature alignment, one approach is to look at the role a company plays in the economy today and use all available information to assess its expected emissions trajectory out to 2050. We then measure what the world would look like in 2050 if the global economy moved at that same speed to reduce emissions. For example, an oil company today – one that lacks a solid transition plan to net zero – might have a temperature alignment of more than 5ºC. If all companies in the global economy had a similar commitment, we would expect a global temperature rise of more than 5ºC. By contrast, an oil company with a solid transition plan might be measured at 2ºC or below, for the same reasons. This approach helps us provide an alignment measurement for companies of varying sizes. For example, a very small coal mining company or a very large oil producer would both have high temperature alignments. That’s because if the whole energy sector resembled either of those companies in 2050, we would see a significant rise in global temperatures.
Climate risk is investment risk. Companies face two key risks – physical risk and transition risk. As policymakers, regulators, and consumers accelerate the transition to a net zero economy, companies that are not prepared for this transition – i.e., companies that will remain dependent on producing or consuming fossil fuels for too long – risk being left behind by their consumers and shareholders. But the transition to net zero also presents a significant investment opportunity. We believe companies that are best prepared for the transition will provide better long-term returns, as they will be better able to function in an economy that looks vastly different from today’s. We believe that markets are not fully pricing in climate considerations into the value of securities. Investors who factor in transition risks and opportunities will likely benefit from an accelerating reallocation of capital to sustainable companies.
There are several considerations investors can take into account to better align their portfolios with the transition to a net zero economy, and it may take a combination of the below approaches to build an entire portfolio that is progressing toward a net zero-aligned pathway.
1. Holistically address portfolios by replacing core exposures:
Reduce – reduce a portfolio’s exposure to the highest carbon emitters, or companies not taking climate actions based on forward-looking commitments. BlackRock has established a “heightened scrutiny model” for companies that are insufficiently prepared for the net zero transition and have low reception to investment stewardship.
Prioritize – allocate capital based on companies’ actions to transition, such as companies reducing
their reliance on fossil fuels, publishing transition plans and setting science-based targets.
2. Focus on a particular part of the portfolio:
Target – invest in a specific sustainable economic activity, such as clean energy, or investments directly tied to projects that advance environmental purposes, such as green bonds.
3. Integrate data and tools that measure temperature alignment:
Overlay – use latest research and data that measures temperature alignment for issuers and investments. Investors can integrate the temperature alignment data into investment processes alongside traditional financial data.
4. Use votes and engagements to change behavior:
Engage – asset managers can use investment stewardship to ensure companies are mitigating climate risks and considering the opportunities presented by the net zero transition.
Just booked a long-anticipated vacation? Celebratory dance! Just enrolled in the maintenance plan for your HVAC system? That’s far less exciting. But when your AC quits in a heat wave, you’ll be dancing when the tech shows up for priority service. As investors, sometimes we need a reminder why we enroll in the less flashy stuff, too. While the stock market has soared in 2021, it’s been a tougher ride for fixed-income investors. Interest rates are exceptionally low to help support the economy, and even though rates were expected to go nowhere but up, they defied expectations and dipped even lower for much of the year. With yields (the expected return on a bond) so low and volatility potentially rising, it wouldn’t be surprising if you’ve wondered what bonds have done for you lately. But like signing up for just-in-case maintenance can keep you cool in a pinch, bonds can help us maintain our portfolios’ cool, too. Especially today, when there’s still the threat of volatility and uncertainty from shifting interest rates, it’s important to remember why we bother with bonds in the first place: diversification.*
There’s a give and take to diversified, balanced portfolios. Sometimes, stocks soar and leave bonds in the dust (ahem, 2021). But other times, stocks are volatile and
bonds provide a welcome degree of stabilization. In other words, if you’re well diversified, one part of your portfolio is likely to
outperform as another underperforms at any given moment. Ultimately, this balance should provide a less volatile experience overall. All the portfolios in FIGURE 1 generated significant positive returns over the time period shown, but the balanced one provided a less turbulent journey.
Unfortunately, there’s no telling which asset class is going to be in favor in any given year. Even the experts who thought rising rates were a no-brainer this year have gotten it wrong lately. That’s why it’s important to work with your financial professional to be prepared for whatever the market throws at you. With continued interest-rate uncertainty on the horizon, here are three strategies to discuss with your financial professional that may better withstand shifting interest rates:
Whatever you decide, working with professionals who have experience and extensive resources should make it a little easier to sit back and focus on other important things. You know, like putting your feet up in your perfectly climate-controlled home to plan a well-deserved vacation.
S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. Bloomberg US Aggregate Bond Index is composed of securities from
the Bloomberg Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.
“Bloomberg®” and any Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of
the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Hartford Funds. Bloomberg is not affiliated with Hartford Funds, and Bloomberg does
not approve, endorse, review, or recommend any Hartford Funds product. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information
relating to Hartford Fund products.
Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit,
liquidity, call, duration, event and interest-rate risk. As interest rates rise, bond prices generally fall. • Loans can be difficult to
value and less liquid than other types of debt instruments; they are also subject to nonpayment, collateral, bankruptcy, default,
extension, prepayment and insolvency risks.
Each spring, we hear echoes of a favorite line among many market watchers: the months of May through October
have proved the worst of all in terms of return for U.S. investors, so better to watch out. Perhaps even cut and
run. Among other such compartmentalizations of historical returns, the goal presumably is to show that there
are ways to profitably time exposure to the market. Let it be known that we’ve yet to see such a review
consistent enough to warrant a drift from our long-term approach to investing.
– It’s true that the months of May through October seem to have been less favorable from a total return
standpoint over the years
– The return is still positive, however, just less so than during other months of the year
– The upshot is that remaining invested throughout the year still has proved a more fruitful strategy than
attempting to time market move
It’s a well-worn mantra in stock circles that the months between April and November might best be avoided. And
market history for a time suggested investors might have been better off had they taken heed. But since the close of
World War II, those following the refrain might have been disappointed. Sure, the cumulative long-term returns for
U.S. stocks (as proxied by the S&P 500 Index) from the months that include May through October remain the worst
of any consecutive six-month combination. And six of the ten-worst single-day declines in the S&P 500 have occurred
in those months. However, looked at another way, as we do in Figure 1, that returns from May through October are
on average worse than those during the other six months of the year is a fact without much consequence. Who cares
that the returns are lower? They’re still positive.
And that means that investors might have been better off by remaining invested throughout the year. And by better off,
we mean substantially so. Thanks to the “miracle of compounding,” even what seems like relatively meager additional
gains of 2.9% per year over the May-October period may have helped to build wealth over time. An investor who sat
tight might have generated a total return of 11.6% per year since the beginning of the 1950s, much better than the
8.4% return generated when one invested in only the “best” six-month period of the year.
This is another fine example of market legend that potentially leads investors to make poor choices regarding long-term
financial plans. The way the story often is offered, it may leave the impression that returns are negative, on average,
across the May-October period. And folks might react “accordingly”. As we’ve shown, though, returns are meaningfully
positive over those months, too.
Markets have become a good bit more volatile seemingly in light of concerns with regard to global inflation trends,
challenges within China’s real estate sector, politicking over the U.S. national debt, insecurities around energy
availability through the winter, and the stability of the Federal Reserve Board membership. Songs with rhymes like the
one that prompted this note likely will grow louder. But we caution readers that, unless individual financial
circumstances have changed greatly over the medium-term, it’s often been the better course to remain true to an
existing investment plan, rather than joining in with the time-the-market chorus.
Statera Asset Management is a dba of Signature Resources Capital Management, LLC (SRCM), which is a Registered Investment Advisor. Registration of
an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational
purposes and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should
be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence
as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the
suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable
definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully
reviewed prior to making any investment decision. Please contact your investment adviser representative to obtain a copy of Form ADV Part 2. All data
presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.
The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research
and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources
believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss
arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations
associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent
all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified
or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future
events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus,
potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an
offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the
appropriate investment vehicle.
The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate
taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS
(agency and non-agency).
One cannot invest directly in an index. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Investing in any investment vehicle carries risk, including the possible loss of principal, and there can be no assurance that any investment strategy will
provide positive performance over a period of time. The asset classes and/or investment strategies described in this publication may not be suitable for
all investors. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon, tax liability and
From rising inflation to the COVID-19 Delta variant and more, there is no shortage of risks and challenges facing investors in today’s global market landscape. But from our perspective, many fixed-income market participants have been more or less looking past such macro concerns in favor of a more upbeat narrative around continued economic recovery and growth. This narrative has gained ample support from the global trend of ongoing monetary and fiscal policy stimulus, particularly in the US, since the onset of COVID-19. What happens in Washington doesn’t stay in Washington.
With that in mind, let’s examine the key US government policy catalysts that have been moving fixed-income markets in recent months and may continue to do so in the period ahead.
The US Federal Reserve’s (Fed’s) September 21–22 Federal Open Market Committee (FOMC) meeting and accompanying statement, followed by Fed Chair Jerome Powell’s press conference, finally gave investors some much-needed clarity around the potential start date and pace of Fed tapering.
Essentially, the FOMC indicated that the Fed expects to begin winding down its large-scale asset-purchase program in November 2021—sooner than most market participants had anticipated—and could then complete the tapering process as early as mid-2022. (However, the Fed of course retains flexibility to postpone or slow tapering in response to evolving inflationary and other economic or market conditions). Importantly, regarding short-term interest rates, Chair Powell seems to have expressly de-linked tapering from the timing of when the Fed may begin to raise the federal funds rate. In other words, just because tapering commences does not necessarily mean that rate hikes will happen immediately (or even soon) thereafter.
Naturally, fixed-income market participants will be keeping a close eye on Fed-related developments, both its words and its actions, in the coming weeks and months.
US fiscal policy appears to have entered an era of greater government spending, which may spur higher inflation and help drive fixed-income markets going forward.
In August, the US Senate overwhelmingly approved President Biden’s US$1 trillion spending package to rebuild and upgrade the nation’s aging infrastructure and to fund new climate resilience and other initiatives. The bipartisan bill must now pass the US House of Representatives, which seems probable at this juncture, before it can be enacted into law. (For more on the Biden administration’s infrastructure plans, see A Revival in US Investment Spending: Implications of the Biden Infrastructure Plan, authored by our colleague, US Macro Strategist Juhi Dhawan).
In addition, and perhaps even more critically, the Senate is currently working on a multi-trillion dollar budget resolution that is heavy on so-called human infrastructure and may be able to clear that chamber by way of congressional reconciliation (a simple majority vote). Along with the above-referenced infrastructure bill, this illustrates how US fiscal policy appears to have entered an era of greater government spending, which may spur higher inflation and help drive fixed-income markets going forward.
Meanwhile, September was marked by multiple US “fiscal cliffs”: Extended unemployment benefits expired, the federal eviction moratorium was lifted, and expanded SNAP benefits are falling off. The hard-to-answer question here is, how well will the US economy transition toward earned income sustaining consumers as these fiscal transfers fade?
US lawmakers may once again find a way to raise the debt ceiling, but the near-term path to that hoped-for outcome could be rocky.
Concerns about the US federal debt limit are mounting as Congress prepares for a high-stakes showdown over raising this debt ceiling ahead of a mid-late October deadline—the approximate date by which the government could exhaust the extraordinary funding mechanisms that allow it to stay below the statutory debt limit. While unlikely, failure to raise the debt ceiling in time would imply selective government-debt default, potentially leading to an array of negative economic and market consequences. Moreover, if a federal government shutdown occurs (even for a short period), the collapse of debt-ceiling negotiations would delay delivery of any further US fiscal stimulus measures.
US lawmakers may once again find a way to raise the debt ceiling, but the near-term path to that hoped-for outcome could be rocky and negotiations may go down to the wire. In the interim, debt-ceiling worries and related political brinksmanship have already created some fixed-income distortions, notably at the front end of the Treasury bill market. Similar market dislocations and volatility took place amid the debt-ceiling battle of 2011, when doubts around government creditworthiness led Standard & Poors to strip US sovereign debt of its AAA credit rating.
1 A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
2 Spreads are the difference in yields between two fixed-income securities with the same maturity, but originating from different investment sectors.
3 Risk assets refers to assets that have a significant degree of price volatility, such as equities, commodities, high-yield bonds, real estate, and currencies.
The views expressed here are those of the authors. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams, and different fund sub-advisers, may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.
Important Risks: Investing involves risk, including the possible loss of principal. • Fixed-income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall.
1. Keep perspective: Downturns are normal and typically short
• Market downturns may be unsettling, but history shows stocks have recovered and delivered long-term gains.
• Over the past 35 years, the stock market has fallen 14% on average from high to low each year, but still managed gains in 80% of calendar years.
Past performance is no guarantee of future results. See footnote 1 for details.
2. Get a plan you can live with – through market ups and downs
• Your mix of stocks, bonds and short-term investments will determine your potential returns, but
also the likely swings in your portfolio.
• Pick an investment mix that aligns with your goals, timeframe, and financial situation, and you can
stick with despite market volatility.
Past performance is no guarantee of future results. Data source: Morningstar, Inc., 2019 (1929-2018). See footnote 2 for details.
3. Focus on time in the market – not trying to time the market
• It can be tempting to try to sell out of stocks to avoid downturns, but it’s hard to time it right.
• If you sell and are still on the sidelines during a recovery, it can be difficult to catch up. Missing even
a few of the best days in the market can significantly undermine your performance.
Past performance is no guarantee of future results. Source: FMRCo, Asset Allocation Research Team, as of January 1, 2019. See
footnote 3 for details.
4. Invest consistently, even in bad times
• Some of the best times to buy stocks have been when things seemed the worst.
• Consistent investing can give you the discipline to buy stocks when they are at their cheapest.
• Consider setting a plan for automatic investments.
Past performance is no guarantee of future results. Sources: Ibbotson, Factset, FMRCo, Asset Allocation Research Team as of
January 1, 2019. See footnote 4 for details.
5. Get help to make the most of a down market
• While no one likes to lose money, your financial advisor may be able to help you take advantage of a
• Tax rules may let you use losses on some of your investments to reduce your future tax bills, or use
lower share prices to convert to a Roth IRA at a lower tax cost.
• Down markets may also be a good time to meet with your advisor to discuss adjusting your
investment mix, or taking advantage of opportunities when prices are low.
6. Consider a hands-off approach
• If you are not comfortable with market risk, consider turning your portfolio over to a professional
through a managed account or all-in-1 mutual fund.
• If you don’t have a strategy, or think yours may be off track, start planning now with our online
tools. Visit Fidelity’s Planning & Guidance Center today.
1. The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and
industry group representation. S&P and S&P 500 are registered service marks of Standard & Poor’s Financial Services LLC. The
CBOE Dow Jones Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock
index option prices. You cannot invest directly in an index.
2. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not
represent actual or implied performance of any investment option. Stocks are represented by the Standard & Poor’s 500 Index
(S&P 500® Index). The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size,
liquidity, and industry group representation to represent US equity performance. Bonds are represented by the Bloomberg
Barclays US Intermediate Government Bond Index, which is an unmanaged index that includes the reinvestment of interest
income. Short-term instruments are represented by US Treasury bills, which are backed by the full faith and credit of the US
government. Indexes are unmanaged, and you cannot invest directly in an index. Foreign stocks are represented by the Morgan
Stanley Capital International Europe, Australasia, Far East Index for the period from 1970 to the last calendar year. Foreign
stocks prior to 1970 are represented by the S&P 500® Index. The purpose of the target asset mixes is to show how target asset
mixes may be created with different risk and return characteristics to help meet an investor’s goals. You should choose your
own investments based on your particular objectives and situation. Be sure to review your decisions periodically to make sure
they are still consistent with your goals.
3. The hypothetical example assumes an investment that tracks the returns of the S&P 500® Index and includes dividend
reinvestment but does not reflect the impact of taxes, which would lower these figures. There is volatility in the market, and a
sale at any point in time could result in a gain or loss. Your own investing experience will differ, including the possibility of loss.
You cannot invest directly in an index. The S&P 500® Index, a market capitalization–weighted index of common stocks, is a
registered trademark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation.
4. US stock market returns represented by total return of S&P 500® Index. It is not possible to invest in an index. First 3 dates
determined by best 5-year market return subsequent to the month shown.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or
tax advice. Consult an attorney or tax professional regarding your specific situation.
Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or
economic developments. Investing in stock involves risks, including the loss of principal.
Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic
developments, all of which are magnified in emerging markets. These risks are particularly significant for investments that focus
on a single country or region.
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