Investors continue to discount the prospect of aggressive Fed tightening and are increasingly concerned a policy mistake and accumulating global supply shocks will push the economy into recession. Futures currently imply a fed funds rate of +2.75 percent by year-end 2022 versus the +0.75 percent expectation at the start of the year. Moreover, the U.S. Treasury yield curve has flattened and shifted considerably higher, with the 10-year yield climbing +138 basis points this year to +2.89 percent at the end of April. Accordingly, the Bloomberg U.S. Aggregate Bond Index generated its lowest one-month return (-3.79 percent) since February 1980, while the S&P 500 Index fell -8.71 percent in April for its worst monthly performance since March 2020. The Russell 1000 Growth Index tumbled -12.08 percent in April due to that measure’s higher weighting of “long duration” stocks, whose valuations are more sensitive to shifts in rates.
As for investment strategy, we have lowered the exposure to economically-sensitive sectors and reduced weightings in industrials, financials (cautious on banks as credit concerns are likely to emerge as the year progresses), and retailers. Conversely, we added to healthcare stocks with above-average growth, less sensitivity to economic disruptions, and attractive valuations. We also added to energy as supply concerns will likely trump demand risks. Portfolio investments focus on quality growth stocks with secular growth drivers, and we prefer domestic exposure due to rising economic and geopolitical risks overseas.
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