Overview: Both stocks and bonds are off to one of their worst starts to the year in history. The S&P 500 Index declined -12.92% through the end of April, and other broad market indices were similarly down double digits.1 What’s worse, investors are losing nearly as much on the fixed income side of their portfolios as they are on the equity side. The Bloomberg U.S. Aggregate bond index, a broad measure of domestic fixed income, suffered its largest quarterly loss (-5.93%) since 1980 to start the year2 and is down -9.50% through the end of April. The current environment has left investors feeling like there is nowhere to hide, and even prompted some to exit markets or go to cash. We want to explain why such a rash response could likely lead investors to miss out on an eventual rebound in stocks. Historical equity performance post-corrections, as well as strong underlying economic fundamentals, suggest a bounce back in stocks will occur sooner rather than later. The Bull Case for Equities: Using History as Our Guide The S&P 500 fell back into correction territory just 22 trading days after leaving; its fastest re-entry into negative 10% performance since November 2008, during the turmoil of the Great Financial Crisis. 3 The table below, which excludes periods when a correction turned into a bear market, maps out how the S&P 500 has performed after exiting a correction. Based on data going back to 1928, the S&P 500 saw a median gain of +11.5% after exiting a correction, and an average gain of nearly +14% — rising nearly 77% of the time.4
The Bull Case for Markets: Strong Economic Fundamentals Beyond historical performance supporting a second half rally in stocks, the critical fundamentals underlying the U.S. economy remain quite strong. Resilient demand, healthy corporate and consumer financial positioning, and rising earnings can act as shock absorbers through the volatility market observers expect to persist in the near- to medium-term. The initial estimate for first-quarter economic growth showed an unexpected contraction. U.S. real GDP (inflation-adjusted) declined 1.4%, versus +6.9% growth in the previous quarter.1 This sharp deceleration was due to a drag from exports, a decline in inventory spending following a sizable increase the prior quarter, and to a lesser extent a contraction in government spending. More importantly, consumer spending, which accounts for nearly 70% of the U.S. economy, continued to grow at a solid pace. Personal consumption accelerated slightly to 2.7% from 2.5% the previous month, driven by spending on services. For perspective, consumer spending grew at an average pace of 2.3% over the past decade.1 In another positive sign for the economy, business investment increased 9.2%, the most in a year.1 Broad momentum in capitalspending should persist as companies accelerate their pace of automation and investment amid ongoing labor shortages. Ultimately, consumers are benefiting from an exceptionally tight labor market and rising wages. With pandemic effects fading, we believe consumption will continue to support above-average economic growth this year. Adding one final caveat, economic growth and stock market growth can diverge significantly, as evidenced by the current state of markets. Importantly, attempting to time the market by exiting existing positions and re-entering a perceived “safer” environment, generally leaves shareholders much worse off. Investors are best served by sticking to a plan, weathering market downturns with smart, riskadjusted asset allocations, and holding on through the turnaround as the most significant gains are captured in initial market rebounds. Economic Definitions GDP: Gross domestic product (GDP) measures the final market value of all goods and services produced within a country. It is the most frequently used indicator of economic activity. The GDP by expenditure approach measures total final expenditures (at purchasers’ prices), including exports less imports. This concept is adjusted for inflation. Index Definitions S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. Bloomberg Barclays US Agg Bond: The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollardenominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency). Disclosures: Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets. The statements provided herein are based solely on the opinions of the Advisor Group Research Team and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions of Advisor Group or its affiliates. Certain information may be based on information received from sources the Advisor Group Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts, and forward-looking statements presented herein reflect the judgment of the Advisor Group Research Team only as of the date of this document and are subject to change without notice. Advisor Group has no obligation to provide updates or changes to these opinions, projections, forecasts, and forward-looking statements. Advisor Group is not soliciting or recommending any action based on any information in this document. Securities and investment advisory services are offered through the firms: Osaic Wealth, Royal Alliance Associates, Inc., SagePoint Financial, Inc., Triad Advisors, LLC, and Woodbury Financial Services, Inc., broker-dealers, registered investment advisers, and members of FINRA and SIPC. Securities are offered through Securities America, Inc., a broker-dealer and member of FINRA and SIPC. Advisory services are offered through Arbor Point Advisors, LLC, Ladenburg Thalmann Asset Management, Inc., Securities America Advisors, Inc., and Triad Hybrid Solutions, LLC, registered investment advisers. Advisory programs offered by Osaic Wealth, Royal Alliance Associates, Inc., SagePoint Financial, Inc., and Woodbury Financial Services, Inc., are sponsored by VISION2020 Wealth Management Corp., and affiliated registered investment adviser. Advisor Group, Inc. is an affiliate of these firms. 4733424
