April Showers Bring May Flowers

In Minneapolis, we have already had one blizzard in April, and more snow potentially is on the way as we endure the third snowiest year on record. As many people here wonder what April blizzards portend for flowers in May, at Bond&Devick we are wondering what bank closures and tightening credit standards portend for interest rates and the markets.

What makes investing so interesting is that investors all have the same data, however there are so many different interpretations based on that data. Currently, if you were to watch your favorite investment news channel for an hour you would witness an amazing array of detailed prognostications about the economy and markets with many of the outlooks downright contradictory. One well respected talking head would outline the reasons for an upcoming recession and a stock market crash, while a few minutes later another well-regarded pundit would share their reasons for a soft landing and a strong stock market and on and on it goes.  How can intelligent people, with vast resources and experiences, produce such divergent viewpoints when they are all looking at the same information?

The short answer is that the economy and the markets are extremely complicated and eternally evolving over time. As we know, history does not repeat itself, but it certainly does rhyme. The issue is we need to make sure we are comparing current trends with past events that are relevant.  Many professionals will find data and charts to support their line of thought, without really challenging their thought process. There is plenty of data and enough research available that could support any market and economic projection – the question is, are we looking at the information and data most relevant to this specific moment? Everyone is doing their best to figure out the future, but if you are extrapolating the data incorrectly you will most likely miss the mark.

This is what we are focusing on at this time:

• The economy was already slowing before the banking crises
• Most market participants believe the Federal Reserve’s rate hiking cycle has been shortened and the terminal rate will be quite a bit lower than what was just anticipated a few short weeks ago
• Given these observations and analysis, it makes sense that interest rates have fallen sharply over the last few weeks and stocks have rallied

As we have communicated recently, we believe we are nearing the end of the rate hiking cycle and, because of this, we have increased the duration (interest rate risk) in many of our client’s bond portfolios. However, we remain cautious about the economic outlook and the short-term prospects for stocks which means we have yet to meaningfully increase stock exposure for most clients or dramatically rebalance portfolios. The Federal Reserve will have a difficult task when they next meet in May. A lot can happen between now and then and we remain relatively cautious at this point. 

Enjoy your Spring and don’t forget to stop and smell the flowers in May,