Tune In

The recent failure of three U.S. banks has raised concerns over the economy and financial system. The situation is still evolving, and there is plenty of speculation about what might come next. One recent development is that government officials from the Treasury, Federal Reserve, and FDIC have announced that depositors will be made whole in an effort to backstop the system and restore confidence. This crisis has already created hardship for many companies and individuals as payrolls are disrupted and access to cash is halted. However, when it comes to investing, it's more important than ever to stay levelheaded and focus on the big picture. What should long-term investors know about these bank failures, and what do they reveal about the financial system?

The U.S. population, like those of many developed countries, is aging. According to the latest Census figures, a major shift occurred over the past two decades in which the share of the population under 50 declined, especially among those of prime working age. Even the youngest baby boomers are nearing retirement age, while the oldest are almost 80. And while millennials have come of age and now outnumber boomers, that hasn't been enough to prevent the average age in the U.S. from shifting from 35.4 in 2000 to 38.8 today. What could these trends mean for the economy and markets in the future?

Stock market volatility has once again picked up as recent economic data have led markets to reverse course after a strong start to the year. While investors have grown accustomed to daily swings, it's still important to remember that stock market fluctuations are unavoidable. After all, it's the willingness and ability to withstand pullbacks in the short run that allows investors to be rewarded in the long run. During periods of uncertainty, understanding the underlying trends driving markets can help investors to maintain perspective.

For investors, it may feel like déjà vu all over again as inflation and the Fed dominate market headlines on a day-to-day basis. After all, driving the numerous market swings last year were the ever-changing expectations around the Fed - both when investors believed the Fed was doing too little, and when they thought the Fed was tightening too much. With markets once again concerned about the direction of the Fed, what do investors need to know about how the story is evolving?

Layoff announcements are ramping up as companies adjust to slowing sales and profitability. So far, significant job cuts have been concentrated in technology and consumer-related industries due to overhiring during the pandemic recovery when demand was extreme. Whether this spills into the broader economy is the subject of debate among investors and economists. With markets already expecting a mild recession in 2023, how should long-term investors maintain perspective on this topic over the next year?

Last year, the bear market in bonds shocked markets and raised questions about the role of fixed-income securities in portfolios. The primary driver of this was, until 2021, inflation had been steadily falling for 40 years, pushing interest rates lower and bond prices higher. This period supported the idea that bonds act as a stable foundation for portfolios, counterbalancing the price swings in stocks and other riskier assets. Naturally, with both stocks and bonds falling last year, many investors may wonder if they need to rethink the role of fixed income in their portfolios.

Over the past week, there has been nonstop news coverage of the federal government hitting the $31.4 trillion borrowing limit known as the debt ceiling. Once again, Washington drama is on center stage as the Treasury Department enacts "extraordinary measures" to not default on its obligations. Although this has become a regular occurrence, many investors are still understandably nervous. While it's unclear how this will play out politically before the estimated June 5 deadline, the fortunate news is that financial markets have taken these events in stride. How can investors maintain perspective around the fiscal uncertainty despite the political theater?

Recent market rallies and pullbacks have been driven by alternating hopes and fears around the Fed taking its foot off the brake pedal - so far, to no avail. Over the last few decades, many investors have been conditioned that "buying the dip" pays and that impulse is still there (old habits die hard), causing large counter-trend rallies. However, this playbook is proving to be dated and dangerous in this new regime of high macroeconomic uncertainty, financial market volatility, inflation, and interest rates.

Major stock market indices have rebounded in October as investors hope for a slowdown in the pace of Fed rate hikes. As of Friday, October 28, the S&P 500 had gained 8.8% over the month, and its year-to-date loss was cut to 18%, just slightly better than bear market levels. The Dow is now above correction territory with a 9.6% year-to-date decline, while the Nasdaq, consisting of hard-hit tech stocks, gained 5% in October to reach a year-to-date pullback of 29%. This occurred despite a jump in interest rates, with the 10-year U.S. Treasury yield rising above 4%. What's driving market optimism, and how should long-term investors maintain perspective?

It's no secret that this year has been characterized by market and economic uncertainty due to inflation, monetary policy, and geopolitics. Prolonged market unease can be attributed to the fact that these economic effects take time to evolve. Inflation is not an overnight event but the result of supply and demand factors since 2020, compounded by monetary and fiscal policies. As mentioned last week, the effects of tightening monetary policy by the Fed are realized on a significant lag. The spike in energy and commodity prices due to the war in Ukraine will not be resolved quickly. Political events in China, the U.K., and the upcoming U.S. midterm election only add to this uncertainty. These facts underscore the need for investors to focus on the long run and resist the urge to react to every market movement, whether positive or negative.