As volatility continues across financial markets, we wanted to provide an update on current events and trends this month. We also wanted to cover an important element to investing given the current environment: the behavioral factor. The last several years have been a good period to be an investor with the market seemingly rising non-stop, and little downward volatility (minus 2020 when COVID hit). However, we are now in a period of high inflation, rising interest rates, and a war in Ukraine (not to mention still dealing with COVID after-effects). With this new period of prolonged volatility and uncertainty, how do we cope as investors and what do our biases as human beings tell us about our investing behaviors? Also, what does this mean over the long haul? We cover all of this below, but first, here are a few relevant updates pertaining to financial markets and the US economy:

Federal Reserve Actions: Fed Chair Powell is looking to carefully (yet swiftly) reduce inflation without pushing our economy into a recession. This goal is what is known as a “soft landing,” which the Fed does not have a good historical track record of achieving. Fed policy miscalculations are seemingly being priced into all major U.S. indices right now as they are all in correction territory (or worse). After recently announcing their largest rate hike in two decades (0.50%), all eyes will continue to be on what the Fed does next as they continue their battle against rising inflation. On the bright side, the Fed indicated it would not look to higher percentage rate hikes at future meetings, so the markets will likely expect either 0.25% or 0.50% from here on out.
Jobs & Wages: The job market continues to show strength. The recent U.S. Bureau of Labor Statistics report illustrated that the U.S. economy added 428k new jobs in April, topping economists’ forecasts of 400k. The unemployment rate remained unchanged at 3.6%, which is a 54-year low. Moreover, the report showed that wages were up last month by 0.3% (slightly below the 0.4% expected reading) and 5.5% over the past 12 months, but the increase has seemingly begun to slow this year. Lastly, labor participation, which measures the percentage of the population that is either working or actively looking for work, shrank to 62.2% for the first time in seven months.
Interest Rates: The 10-year Treasury yield rose above 3% for the first time since late 2018 and recently touched high as 3.2%. To understand the extent (and speed) of this meteoric rise, the 10-year was at 1.58% one year ago and started the year at 1.53%, so it has more than DOUBLED within a period of a few months. The rising 10-year yield has also had a big impact on stocks, particularly growth and tech sectors, where we have seen a large pullback in stock prices. chart showing treasury yield curve 5 6 22 versus last year
Inflation: Inflationary pressures have continued to intensify with the ongoing war between Ukraine and Russia, as well as COVID-related shutdowns in China that are negatively impacting supply chains. The most recent Consumer Price Index (CPI) data for April showed an 8.3% increase, slightly higher than the expected 8.1% reading, which is near the highest level in 40 years. This means that the Fed will almost certainly continue on their projected path of rate hikes. With that being said, there are two pieces of positive news: (1) While supply chains continue to drag, there are slowly signs of improvement. The transportation capacity component of the Logistics’ Manager Index, a measure of supply chain conditions, came in 11 points higher in April compared to March, indicating that pressures may be starting to ease. (2) The CPI did show an increase for April that was higher than economist expectations, but the actual rate of inflation did DROP from the high we saw in March (8.5%). Both of these points could indicate that inflationary pressures may have peaked. U S Inflation Rate
The “Mental Adventure” of Investing Through Down Markets
To conclude our commentary for the month, we wanted to touch on the psychological and behavioral aspects of investing, especially given the downward volatility we have been seeing recently. First off, let’s acknowledge that as an investor, it can be scary and unsettling at times like these. To see your invested balances, that you have worked so hard to grow and maintain, decline can legitimately cause stress and concern. In fact, according to US Investor Sentiment readings by The American Association of Individual Investors, the volatility we have seen thus far in 2022 has led to a higher percentage of bearish investors (increased from 33% to 53% since Jan. 1st) and a lower percentage of bullish investors (33% to 27%). In other words, there is less optimism in the markets right now, and in our experience, that can lead to miscalculations and/or emotional decisions that detract from long-term portfolio performance. On that note, a recent report by Dalbar Inc., called the Quantitative Analysis of Investor Behavior, showed that the average equity investor has earned 7.1% annually on average compared with 10.65% in the S&P 500 index (as of 12/31/21). That difference of over 3.5% per year is indicative of the miscalculations that one can make, understandably so, when trading through periods of excessive volatility on their own.

Of course, as human beings, emotional decisions when it comes to our finances make sense. There are elements of behavioral finance that resonate with many of us, including loss aversion, action bias, and recency bias. Loss aversion is self-explanatory in that it is hard to experience and see losses in our account (but then it is also hard to NOT look at them). Action bias is the tendency to be impatient and seek to act (or trade, in this case) too often because it is difficult to sit idly by. Finally, recency bias is the tendency to tell ourselves that what has happened recently will continue to happen. For example, when markets were continuing to rise over the last few years, it could be easy to assume that this would continue. On the flip side, when markets go down for several weeks/months like we have seen this year, the thought may enter our minds to head for the exits since we think this negative trend will also continue. While these behavioral aspects are different, they are also similar in that they are short-term in nature. We tend to have tunnel vision when good or bad things are happening in the short-term, which then creates this magnifying effect to make it seem exponentially better or terribly worse than it is in the grand scheme of things.

Referencing back at the US Investor Sentiment data, we took a look at the long-term trend of the percentage of bullish and bearish investors over the last 20 years, compared with the performance of a diversified 60% stock, 40% bond portfolio that has remained fully invested. The first observation is that investor sentiment, as would be expected, is all over the place with a lot of zig-zagging up and down. There is hardly a pattern, which makes sense given our short-term thinking as human beings can change rapidly depending on the biases we referenced above. On the other hand, take a look at the green line on the chart, which shows the long-term performance of the moderate risk 60/40 portfolio. There is an evident trend that you can see here, where the portfolio has climbed nearly 290% over the last 20 years with only brief periods of downside volatility. The last interesting point to make can be seen in the annualized numbers (under the “ANN” column at the top of the chart) for all three data points. Annualized bullish sentiment has decreased on average 2.0% per year since 2002 and annualized bearish sentiment has increased 1.3%, and yet, the long-term annualized return of the 60/40 portfolio has been ~7% per year. This shows that staying patient, diversified, and invested (especially during these rough patches) can be the difference between significant returns and below average or low returns.

chart titled staying disciplined can pay off u s investor sentiment versus diversified 60 40 portfolio
We expect market volatility to persist as long as the Federal Reserve’s actions and high inflation continue to take center stage, so it is important to not succumb to these behavioral biases as much as possible. Of course, as dedicated advisors, a big part of our job is to help make sure you focus on the long-term, keep calm, and carry on. Stay patient, keep your portfolio aligned with your goals, and reach out to our team with any questions!

Sources: YCharts, Sanctuary CIO Corner, U.S. Bureau of Labor Statistics, Kiplinger, Dalbar Inc., The American Association of Individual Investors, Logistics Managers Index

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.

The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner’s position, recommendation or investment advice. This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Investments are subject to risk, including but not limited to market and interest rate fluctuations. Any performance data represents past performance which is no guarantee of future results. Prices/yields/figures mentioned herein are as of the date noted unless indicated otherwise. All figures subject to market fluctuation and change. Additional information available upon request. The “Sample Diversified Portfolio (60/40 Allocation) is comprised of the following total return indices and allocations: 40% S&P 500, 3% S&P 400, 4% S&P 600, 15% MSCI EAFE, 5% MSCI Emerging Markets, 40% Bloomberg US Aggregate Bond.