As we move to close out the first quarter, markets have started to feel different.
Not broken. Not panicked (surprisingly). But clearly adjusting.
Equity indices have now logged five straight weeks of negative returns, with the Nasdaq slipping into correction territory. Growth stocks (i.e. like the big tech names we all know), which led much of the recent cycle, have been hit the hardest. At the same time, oil prices and bond yields have reasserted themselves as key drivers of stock prices, reminding investors that the macro environment still matters.
Interestingly, while macro matters, beneath the surface, fundamentals, as in earnings expectations for 2026 have actually moved higher. That leaves us in a unique spot where fundamentals are or at least very strongly seem to be improving, but valuations are compressing. The result is discomfort in the short term, but not necessarily deterioration in the long term. In my opinion, valuations are already more attractive than they were just a few weeks ago for those deploying capital.
To make short term matters worse, a traditional 60% equity/40% bond portfolio just experienced its worst month since 2022, as stocks and “safe haven” bonds were both negative. This tends to get attention and it should. But context matters. And bad returns have a funny way of setting the stage for future positive returns.
It is not all stocks out there
In a world dominated by the talk of stocks, bonds continually need some help to be better understood by investors. So, let’s talk about bonds for a minute.
Over the last five years, many investors feel like bonds have failed them. And they are not wrong. But rearview thinking may be throwing the baby out with the bathwater. Returns over this five year period have been in the range of zero to one percent (before inflation and taxes, ouch) depending on exactly when and where you look. That feels terrible, especially relative to equities.
See the table below (morningstar.com) for arguably the most followed bond benchmark (US Aggregate Bond Index) as measured by the readily available and investable ETF, ticker AGG, which replicates the index:
But here is what is interesting about bonds, this return was also almost entirely predictable.
Five years ago, the 10-year Treasury yield sat around 0.5 percent. When you lend money at half a percent, your return over time is going to look a lot like half a percent. Bonds did exactly what they were priced to do.
This is where bonds differ from stocks. Stocks are driven by earnings, sentiment, and multiple expansion. Bonds are math. Starting yield matters. A lot.
Today, that math looks very different. Well, the math looks the same, but the inputs and thus outputs look different.
Today, yields are materially higher: 4+% on this ETF the AGG and on the 10-Year Treasury bond, vs. approximately 0.5%, for each, approximately five years ago) which means forward return expectations for bonds are higher as well. Not guaranteed. Not linear. But in some ways, far more attractive than they were just a few years ago.
With stocks and bonds (and a lot of other assets), what we are seeing now is a market repricing to a higher cost of capital. That repricing is painful in the short term, especially for growth assets. But it also resets opportunity across both stocks and bonds.
“But, Dane, have safe haven assets (bonds) started to behave more like hedges again during periods of stress?” Well, this is where it is frustratingly confusing in the short run. Interest rate expectations and interest rates themselves continue to shift as investors recalibrate expectations around policy, inflation, and growth. And with those shifting expectations, you can also see in the table above that returns in the short run, say year to date or YTD are also negative in a period when stocks have been negative. Stocks and Bonds have both been negative of late. YUCK!!
So where does that leave us?
In transition.
We see this as a move to a market that is raising its standards. Which makes this discerning CIO happier in a weird long term thinking sort of way. Why? Because now the bond market is offering higher income again and the equity market is being forced to justify its valuations.
We will go deeper (in an attempt?) to clarify this topic further in our full quarterly letter coming out shortly, including: what this means for portfolio construction, trading, risk management, and where we are seeing opportunity across most asset classes.
If you have not scheduled your Q1 quarterly review yet, expect to hear from us shortly to get it on the calendar. This is not one to miss (you know who you are!!).
Because in environments like this, coordination across Risk, Investments, Tax, and Estate matters more than ever.
More to come soon.
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Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.
Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.
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