By Haddon Libby
Investment grade US bonds were down 5% in value in April and nearly 13% for the first four months of April. The thirty stocks that make up the Dow Jones average was off 9% during April while the S&P 500 declined 11% and NASDAQ 16%. Since the start of the year, the NASDAQ-100 which is heavily skewed toward technology companies in value by one-fifth with half of its companies down at least 50% from all-time highs.
What are our key takeaways from recent results? What is an investor to do?
We are no longer in a stealth bear market – the bear roared loudly and showed its teeth in April. Markets have reacted to a confluence of factors that led to the fastest valuation declines since the Great Recession.
Rising interest rates have caused bonds to lose value at the fastest rate since 1994.
Short-term, the shutdowns in China are disrupting supply chains which fuels an already hot inflation rate. Food, fuel, and natural resource supply chain problems (as well as a humanitarian crisis) caused by the Russian incursion into Ukraine will not only stoke inflation but have the potential to be a contagion to unrest globally. While we may be suffering from $6 gas and serious price spikes at the supermarket, countries with poor trade balances that are net importers of food and fuel may have difficulties getting adequate food or fuel supplies until Russia restrictions ease and prices come down.
To understand April results as it relates to your investment portfolio, we need look no further than some of the most highly valued companies in the stock market. In April alone, Microsoft was down 10% with Google -18%, Amazon -24%, and NVIDIA -32%!
Remember the adage ‘buy low and sell high’? We can finally say that markets as a grouping are no longer pricey. If you are investing for the future, now is the time to buy or add to high quality stocks as prices are at significant discounts to only a month ago.
Looking at Price-to-Earnings ratios of the companies that make up market indices, averages are in a very reasonable 15-18x range. When you factor in historically low (but rising) interest rates and negative real rates (i.e., interest rate minus inflation), there are many reasons to long-term investors to feel confident about prospects.
What is an investor to do?
Every person has a different economic reality so there is no one idea fits all strategy. That said, I can share a few ideas you may want to consider a review with an investment professional.
First, bond funds have declined double digits as interest rates have headed higher. If you want to stem losses from higher rates and use of bond funds in a 401k plan, consider short-term funds with low costs or even a money market fund. If you can buy individual bonds, look at maturities in the 2-to-3-year range. Returns will vary from under 1% to over 5% depending on the credit risk and maturity you are interested in. At present, you probably do not want to go longer than 3 or 4 years as returns are nearly the same for longer dated maturities. Also, always know your ‘yield to worst’ when buying a bond as that number is usually different than the stated coupon.
Second, if you hold individual stock positions, now is a good time to look at upgrading the quality of your portfolio. For example, if you held something like Texas Instruments because NVIDIA had been too expensive in the past, now would be a time to reconsider NVIDIA. If you were in Macy’s, Amazon might be an interesting replacement now that the Amazon’s stock price has fallen 25%.
As a reminder, when getting advice with your investment portfolio, seek out Registered Investment Advisors like us who perform to the Fiduciary Standard of Care. Our interests are aligned with our clients – something that is not always the case with brokers.
Haddon Libby is the Founder and Chief Investment Officer for Winslow Drake Investment Management. For more information or a no-cost review of your portfolio, please visit us at www.WinslowDrake.com.