The year promises to be difficult for the markets

For the rare time since the start of the year, Wall Street posted solid gains yesterday as its major indexes (Dow Jones, SB&P 500, Nasdaq) all ended the day up 3 percent.

This will put some balm on your wallet’s depression. But don’t get carried away too quickly. The year promises to be difficult for the markets.

As you read your April 30 investment statements, you may be shocked.

And regardless of whether you hold a portfolio of stocks, bonds, equity funds, bond funds, mixed funds, index funds.

If you just have a balanced portfolio, say 50% in bonds and 50% in stocks (half and half Canadian and foreign), you’ll see a loss of about 8.4% over the first four months compared to the value of your portfolio end of December 2021.

FED RISE STRONG

As forecast by all financial analysts and economists around the world, the US Federal Reserve (Fed) hiked interest rates by half a percentage point yesterday, the largest hike in almost 22 years. The rate thus increases to 1%.

You will say to me: “There is nothing! Unfortunately, the opposite is true: the increase of half a percentage point confirms that the Federal Reserve has indeed started to tighten monetary policy.

Yesterday’s half point is just the start of a series of back-to-back Fed rate hikes aimed specifically at countering runaway inflation hitting the United States. The Fed’s interest rate could rise above 2.5% by the end of the year.

The Fed’s big challenge? Successfully fight inflation by raising interest rates to avoid plunging America into a recession.

In theory, one of the worst negative factors for the stock market is the rise in interest rates.

But how did the stock market indices react after the announcement of the Fed’s interest rate hike at 2 p.m. yesterday? They all rose! How can we explain this positive reaction from investors?

Answer: The Fed’s half-point hike has already been largely priced in by previous equity market falls.

THE DEPTH?

Now the big question: have the major pullbacks in the three major US indices bottomed out since the beginning of the year? As of late April, here are the declines they had booked since early 2022:

  • Dow Jones: -9.25%
  • S&P 500: -13.3%
  • NASDAQ: -21.2%

The Canadian stock market did a better job of defending its investors, falling just 2%.

As for the bond market, the losses are huge, ranging from 10% to 18% in the first four months of the year.

All the better when the stock market bottoms and the bond market bottoms.

But I wouldn’t bet on it because of the big unknowns that exist in terms of the magnitude of the economic fallout from the Russia-Ukraine conflict, controlling inflation, the rising price of a barrel of oil, the impact on the economy of supply problems, etc .

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