As they are making their way through the dark forest in the 1939 film The Wizard of Oz, Dorothy innocently turns to Scarecrow and Tin Man and asks, “Do you suppose we’ll meet any wild animals?”. To which Tin Man says, “We might”. This leads to the three of them walking through the woods, repeating the refrain “lions and tigers and bears, oh my”, as you can see in the YouTube video clip below.
During the first quarter of this year, we had our own scary trio of investment and economic issues to confront, as we continue our journey through the uncertain economic landscape. However, rather than the ferocious animals described above, our frightening issues took the form of banks and inflation and recessions…oh my!!
We want to use today’s short lesson to remind you that there is often a disconnect between the economy and the financial markets. You would expect such scary news and uncertainty to create significant volatility in the stock market. However, as you can see in our first chart, we have actually experienced the lowest level of volatility we have seen since 2017, as measured by days in which the markets moved up or down more than 2%.
Much of this has to do with the fact that markets tend to lead the economy. This means that they are moving 3 to 6 months in advance of the actual headlines. This is important to remember, as there is much talk about a pending recession. Markets often move down in advance of the recession starting. And, while we are in the recession, and in the most dire part of the economic news cycle, markets often turn and start going up dramatically, seemingly without reason, and well in advance of the recession ending.
Within the bond market, you can see a similar phenomenon playing out this year. Our second chart shows that in the three months ended February 28th, there were massive deposits made into money market funds since they are now paying higher yields than we have seen in nearly 20 years. However, that did not equate to the best performance, as you can see from the right side of the chart. Many sectors of the bond market actually outperformed money market funds, some by a wide margin.
The CFPs at Impel Wealth Management will continue to monitor these trends. Despite the scary economic landscape, we understand that there is often a disconnect between what is going on with the 24-hour economic news cycle and what is happening in the global stock and bond markets. This is an important distinction and something we wanted to remind you of as we continue “Moving Life Forward”.
© 2023 Jesse Hurst
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.