Equity Markets Overview
If this is a correction, markets are likely in the early phases of a bottoming period that could take weeks or several months to resolve. While market volatility can feel painful, it also creates opportunity via rebalancing, tax-loss harvesting strategies and reallocation. Having said that, we would remain cautious. In addition to valuations, the Trump administration seems prepared to endure short-term pain for long-term gain.Treasury Secretary Bessent said in a recent CNBC interview, “There is going to be a natural adjustment as we move away from public spending to private spending. The market and the economy have just become hooked and we’ve become addicted to this government spending and there’s going to be a detox period.”
In the long term, this is likely healthy for the markets and the economy, but in the short term, we think it adds to market risk.
On further weakness, for clients that are under-allocated to equities, we would slowly add to positions as it is not possible to time the markets. We suspect you will see numerous fluctuations in the weeks ahead, and we will be looking for opportunities to rebalance portfolios to take advantage of the volatility.
Fixed-Income Markets Overview
Within the fixed-income markets, there are certain indicators we can look to in an attempt to define the severity of the current upheaval, the most popular being Treasury yields.Treasury yields across the maturity spectrum have declined, with the 2-year Treasury at five-month lows and the 10-year Treasury yield at three-month lows as a result of a flight to quality. This is typical during periods of uncertainty as investors prefer the safety of U.S. Treasuries.
While the bulk of the data does not suggest a significant increase in risk, we do expect the elevated level of volatility to remain for some time.
Within our fixed-income strategy, we are taking the opportunity to add to high-quality, longer-maturity bonds. Should the current dislocation continue, then these bonds could outperform other asset classes owing to their higher yield. If conditions deteriorate further, then the potential outperformance of these bonds could act as "insurance" for a balanced portfolio.
We continue to monitor Treasury yields and other variables to help us navigate the current environment. For a deeper look at these variables, read Head of Fixed Income Chris Gunster’s analysis linked here with the first iteration of our "Recession Tracker" chart.
In Short, What is Concerning for Markets?
- Credit spreads increasing
- Short-term inflation expectations are high
- The market keeps pricing in more cuts for 2025
- Questions around the federal budget
In Short, What is Supportive for Markets?
- Consensus earnings forecast is still supposed to be strong (roughly 10%)
- Market expectation is that the Fed will cut (3) times in 2025 with the possibility of ending quantitative easing (QT)
- Prospect of more stimulative policy down the road
- Treasury yield curve is still positively sloped
Despite recent market performance, it is important for investors to maintain a long-term perspective. Market fluctuations, while unsettling, are a normal part of investing and often present opportunities for those who remain patient and disciplined. Economic cycles ebb and flow, and history has shown that markets tend to recover and grow over time. Staying informed of, but not reactive to, daily market movements, is key to navigating periods of volatility successfully.
We will continue to monitor market signals and take action accordingly. As always, we are here for you. Please reach out to your Fidelis Capital team with any questions.
