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 indices (Dow Jones, SB&P 500, Nasdaq) all ended the day up three percent.

This will put a little balm on the depression of your wallets. But don’t get carried away too quickly. The year promises to be difficult for the markets.

When you read your investment statements as of April 30, you may be shocked.

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

If only with a balanced portfolio, say 50% in bonds and 50% in equities (half and half Canadian and foreign), you will see, for the first four months, a loss of approximately 8.4% per compared to the value of your portfolio at the end of December 2021.

STRONG RISE IN THE FED

As predicted by all financial analysts and economists around the world, the US Federal Reserve (Fed) yesterday raised its key rate by half a percentage point, its largest increase in almost 22 years. The rate thus increases to 1%.

You are going to say to me: “There is nothing there! Unfortunately, it is quite the opposite: the increase of this half percentage point confirms that the Federal Reserve has indeed begun the process of tightening its monetary policy.

Yesterday’s half-point is just the start of a series of successive Fed rate hikes aimed in particular at countering the galloping inflation that is hitting the United States. The Fed’s key rate might exceed 2.5% by the end of the year.

The Fed’s big challenge? Successfully fight inflation by raising interest rates so as not to drag America into recession.

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

However, following the announcement of the increase in the key rate of the Fed, yesterday, at 2 p.m., how did the stock market indices react? They all went up! How can we explain this positive reaction from investors?

Answer: The Fed’s half-point hike was already widely discounted through previous stock market declines.

THE LOWS?

Now the big question: have the big pullbacks recorded by the three major US indexes since the start of the year bottomed out? At the end of April, here are the declines they had posted since the start of 2022:

• Dow Jones : – 9,25 %
• S&P 500 : – 13,3 %
• Nasdaq : – 21,2 %

The Canadian stock market, on the other hand, defended its investors better, falling only 2%.

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

That said, so much the better if the bottom of the stock market and the bottom of the bond market have been reached.

But I would not bet on this because of the great unknowns that persist in relation to the extent of the economic consequences of the conflict between Russia and Ukraine, the control of inflation, the soaring price of a barrel of oil , the impact on the economy of supply problems, etc.