In today’s Steady Investor, we cover current events that we believe are shifting the current state of the volatile market, such as:
What Last Week’s Fed Minutes Tell Us – This week, market-watchers were eagerly anticipating the release of minutes from the Fed’s May 3-4 meeting. Analyzing minutes is important for understanding the potential path of rate increases and as a means for understanding just how hawkish the Fed is. The verdict is that the Fed is prepared to take rates as high as needed to stem inflation pressures, which could mean additional 50 basis point increases at future meetings and also potentially raising rates high enough to intentionally slow the economy. The Fed has not raised rates by a half percentage point since 2000. This strategy is reminiscent of Fed Chairman Paul Volcker’s monetary policy strategy in the 1980s when he deliberately caused a recession in an effort to tamp down the ‘great inflation’ of the late 1970s. Back in the 1980s, however, Chairman Volcker moved the fed funds rate past 20%, whereas today the fed funds rate sits at a range between 0.75% and 1%. In reality, comparing the two approaches is like comparing night and day. The Federal Reserve also made note in their May 3-4 meeting of their intent to begin shrinking their $9 trillion portfolio on June 1, which will remove a significant source of demand from the bond and mortgage securities markets. Upward pressure on mortgage rates and longer duration interest rates is to be expected, which could be a positive if it ultimately results in a steeper yield curve.1
Guard Your Investments Against the Market Correction!
As inflation worries grow, and the market enters correction territory, many investors may be unsure of how to protect their investments. This can cause investors to make knee-jerk decisions that run counter to long-term goals.
To help you navigate this turbulent time, we have put together a free guide to help you avoid the worst impacts of a sudden market drop.
If you have $500,000 or more to invest, download our guide, 4 Keys to Navigating a Stock Market Correction2, which offers the most important steps you can take to help ensure that a temporary market downturn won’t cause irreversible long-term damage to your portfolio.
Why Dividend-Paying Stocks are Being Favored – S&P 500 companies paid out a record $137.6 billion in dividends in Q1, and investors are taking notice – particularly as volatility continues. For years, investors have been flocking to the high growth, high valuation technology trade, which gained even more steam during the pandemic as the economy made a significant shift to digital everything. But as interest rates have moved higher and the growth outlook moderates, many of these high valuation names have experienced sharp selloffs as investors favor cash overgrowth. What’s more, investors appear to be going a step further and favoring companies that are choosing to use cash reserves to pay out higher dividends versus opting to buy back shares. This shift demonstrates that investors again are favoring cash payouts now versus the prospect of profits later. The proof is in the pudding – the S&P 500 High Dividend index is up +3.6% in 2022 while the S&P 500 Buyback index is off -13%.3
Who Won the U.S. – China Trade War? It’s been nearly three years since the U.S. ratcheted up tariffs on Chinese imports, an action that escalated into a trade dispute and eventually a resolution that was supposed to see China buying more U.S. goods. It didn’t happen. China fell 40% short of its commitment in Phase One of the trade deal to buy an additional $200 billion over two years, and reports of technology theft and unfair practices continue. For its part, China has not necessarily benefited from the trade dispute and resolution, either. Economists note that Chinese companies that were hit with tariffs have spent less on research, reduced hiring, and exported less to America.4
A Note on the China-U.S.-Taiwan Risk – President Biden’s trip to Southeast Asia this week in some ways reminded the world of another potential geopolitical conflict in the offing: a Chinese invasion of Taiwan. U.S. policy on Taiwan has been one of “strategic ambiguity” since Nixon’s days, which has largely positioned the U.S. as an ally and arms supplier to Taiwan without defining what military action, if any, the U.S. would take to support it. In many ways, the Russian invasion of Ukraine is serving as a case study for how Western countries might respond to an unprovoked invasion of democracy like Taiwan, and President Biden’s comments that the U.S. would consider defending Taiwan have perhaps served to have China grasp the full economic – and perhaps military – repercussions of an invasion. For markets, regional conflicts like the Russia-Ukraine war have not historically had a severe impact on the global economy or equity markets. But a conflict that involves the U.S. and China would, in our view. It’s a risk to keep an eye on.5
How to Navigate a Market Correction – Volatility has shifted the market in many ways this year, and for those who are unsure of how to navigate a market correction, we want you to be prepared.
With that being said, now is the perfect time to base your investing decisions on research and fundamentals. To help you do this, we have created a guide, 4 Keys to Navigating a Stock Market Correction6. This guide answers question like – Are there any silver linings that come with it? What are some ways to navigate through it?
If you have $500,000 or more to invest and want to learn more, click on the link below to download our latest guide: 4 Keys to Navigating a Stock Market Correction6.
Disclosure