Insights

May Market Update: Bond Performance and More

We hope you are well. We’d like to continue to update you on the ongoing financial market volatility. This has been a difficult start of the year for both stock and bond investors. As of May 10th, the S&P 500 Index is down 15.7%, the tech and growth-oriented Nasdaq Index is down 24.8%, and the MSCI All Country World Index (ACWI) is down 16.7%. Fixed income has traditionally acted as an investor safe haven, but the bond market is also down because interest rates are rising rapidly. The Bloomberg Aggregate bond index is down 9.7% year-to-date thru May 10th, 2022. This is the worst bond market performance in nearly 50 years.

Key drivers of the broad investment market decline include the following:

  1. The Federal Reserve and other central banks recently signaled aggressive interest rate hikes in order to tame inflation.
  2. China’s ‘zero Covid’ policy is disrupting the domestic Chinese economy (a significant supplier and end-market for many US multinationals such as Apple). This lockdown policy exacerbates existing supply chain problems.
  3. The Ukraine war is causing a spike in key energy and food commodity prices. In addition, military conflict and ongoing geopolitical instability raise concerns about global trade and diplomacy to resolve existing tensions. 

In general, the bonds in our investment portfolios are shorter duration and are performing better than the Barclays Aggregate bond index so far this year.  During the same period, our equity investment portfolios have lagged behind the S&P and ACWI benchmarks, but are outpacing the Nasdaq Index. We continue to believe that investing in firms with superior earnings growth and higher returns on capital should lead to better stock performance over time. Our current client portfolios tend to overweight the sectors of technology (e.g. Microsoft), healthcare (e.g. Abbott Labs), and consumer discretionary spending (e.g. Amazon), while underweight the sectors of energy (e.g Exxon), financials (e.g. JP Morgan), utilities (e.g. Nextera), and consumer staples (e.g. P&G). This orientation has benefited our performance over the past 3 calendar years, but has detracted so far this year.

We continue to reevaluate the active managers and ETFs that we hold.  In US large cap, two growth funds have underperformed the Nasdaq, primarily because they own stocks that faced company-specific challenges such as Netflix, Facebook and Paypal. On the whole, both fund managers continue to invest in companies with strong business fundamentals. However, we are planning to reduce this allocation over time.

Over the last several months, we rotated away from small cap growth and cut our exposure to China by 50%. We further trimmed our international exposure as the Ukraine conflict escalated. In summary, we are reducing our equity allocation, and we continue to adapt our analysis of the current situation. The first quarter’s earnings season is underway, and we are heartened by many of the better results of individual companies as the economy slows.

We look forward to updating you as the situation evolves and please reach out to us with your questions.

Thank you,

Your ChoateIA Team

Disclosures:

  • The equities identified are examples of holdings and are subject to change without notice. The equites have been selected to highlight examples of each sector.
  • Returns are presented net of investment advisory fees and include the reinvestment of all income.
  • The MSCI ACWI is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI Index consists of 47 country indices comprising 23 Developed Markets and 24 Emerging Markets.
  • The Bloomberg US Aggregate Bond Index TR is an unmanaged index that covers the investment grade fixed-rate bond market index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
  • The S&P 500 Index is a widely recognized, unmanaged index of common stock prices. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.