By: Ryan P. Johnson, CFA, CFP® - Managing Director of Investments
Slowing growth is the theme of recent reports, but stocks and bonds have posted positive single digit returns so far this year. This may be the last chance to get an attractive Series I Savings Bond. Will the next Fed hike be the last?
Economy & Fed:
Employment remains strong with the recent monthly jobs report showing national unemployment at a still historically low rate of 3.5%. Weekly jobless claims have been on the rise since late January but there are still a high number of job openings. The ISM Services report for March showed growth but missed expectations. Headline CPI (consumer inflation) year-over-year in March was 5.0%, the lowest reading in nearly 2 years. At the start of April, however, OPEC+ announced a surprise oil production cut that pushed the price of oil over $80/barrel. This will impact the next CPI reading in early May, but we expect the downward trend in inflation readings to resume.
The next Fed announcement is May 3rd, where they are expected to raise rates by 0.25% to a range of 5.0-5.25%, which could be the last rate hike of this cycle.
Q1 earnings season is just beginning. Sentiment indicators headed into this earning season were still more negative than usual, which has historically led to a positive overall market during earnings season. The VIX (volatility) index was recently at its lowest level since the market high in January 2022. Large, mid, small, and international stock indexes have all posted gains in 2023.
In aggregate, corporate sales and earnings are expected to grow very little in 2023. While earnings may show a year-over-year decline for the second straight quarter once Q1 reports are in, this could be the low for quarterly earnings, in dollar terms, at the index level. While valuation is average compared to the past 5-10 years, we suggest owning stocks with money that is allocated to 5+ year time horizons. On a 5+ year basis, we feel stocks should see historically normal returns. We expect this to be higher than what could be achieved in the bond market, even though bond yields are currently attractive. Across several metrics, skepticism is plentiful, which has often led to stock market gains over the ensuing 1-year period.
In a study from 1926-2021, using rolling monthly returns, in any given month stocks gained 63% of the time; 1 year 76%, 3 years 84%, 5 years 88%, and over rolling 10-year periods, stocks gained 95% of the time.
Treasury yields are broadly similar to where they were a month ago except the 3-month yield, which moved up to 5.2% recently, in anticipation of the next Fed hike in early May.
Series I Savings Bond yields are expected to fall below 4% when they reset on May 1. If you purchase a bond now you would get 6.89% for 6 months and you would start earning the new rate in October. Even if rates fall below 4% for the next reset, owning an I Bond could net you over 5% in return for the next year. Limits and rules apply; please see treasurydirect.gov for details.
Buckingham is here for you:
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Thank you for your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Managing Director of Investments
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.