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This Too Shall Pass

The S&P 500 index rose 3.6 percent for the month of March, snapping back from a tumultuous January and February and recovering more than half of its losses from being down 12.5 percent at its lowest point during the quarter. Inflationary and geopolitical challenges were front and center in the first three months of 2022, but the U.S. economy continued to show signs of strength.

Businesses reported being able to pass rising costs on to consumers, which boosted their profits, and employment growth kept consumers spending as prices rose. US employers added 678,000 jobs in February, which was more than 50 percent above consensus expectations. The Dow Jones Industrial Average also added 2.32 percent, and the Nasdaq Composite picked up 3.41 percent in March.

The Federal Reserve implemented its long-awaited plan to raise interest rates in mid-March, raising the federal funds rate by 25 basis points (0.25 percent). While stocks wobbled immediately following the Fed’s rate increase news, investors then interpreted the Fed’s first step as a commitment to taming inflation and a reassuring statement about the current health of the economy to withstand higher interest rates.

Also during the first quarter, investor attention turned to the bond market when the difference in the return between short-term interest rates and long-term interest rates (a.k.a. “the spread”) narrowed. At the start of 2022, the yield on 2-year Treasury notes was 0.78 percent and the yield on the 10-year Treasury note was 1.63 percent. At quarter-end, the yield on 2-year and 10-year Treasury bonds both stood at 2.3 percent.

This type of move in long-term rates is an indicator that investors expect growth to slow in the near future (markets are pricing in a weakening economy), but yield curves are not flawless predictors of future economic activity. Yield curve inversions have preceded all past recessions, but not all inverted yield curves lead to a recession. This is something Charter Oak advisors will continue to keep an eye on in the months ahead.

Your Charter Oak advisors fully understand the human tendency to feel a bit exhausted by the chaos of the past two years – and counting. And we write to provide another kind reminder of the importance of being as rational an investor as possible during these inevitable times of uncertainty, when emotions can take over.

The knee-jerk desire to get out of the market can be a powerful one, yet going to cash savings earning 0.50 percent – especially in a 7 percent inflation environment, is in fact the antithesis of “safe.” Such a move is sure to sidetrack an otherwise successful long-term financial plan.

In such times, we invite you to slow down. Take a bird’s eye view of previous events in history, including the other terrible shocking events you may have lived through as an investor. It happened then as it will happen now, the moment passed, the economy and markets recovered, the great companies continued to innovate and adapt to new challenges, and new companies emerged.

Changes in the market can be akin to changes in the weather. Some days the sun is shining and the sky is blue, other days a storm comes through. Yet, the trajectory of the goal-focused, plan-driven, long-term successful investor has been overwhelmingly positive.

Your Charter Oak advisors remain focused and ready to guide you through today’s current economic and market movements, while staying disciplined to your long-term financial goals. There is no success without challenge, there is no sun without clouds, no comfort without initial discomfort – that is the way of the world.

Wishing you a happy spring, especially now that your taxes are (hopefully) done and the daffodils and tulips start to emerge from your gardens. It is our pleasure and privilege to serve you, and we welcome your questions and thoughts as the year continues.