Second Quarter 2022 Market and Economic Review

MARKET REVIEW

Despite maneuvers by the U.S. Federal Reserve (and other such institutions and governments around the world), the surging inflation continued throughout the second quarter of 2022 continuing to squash markets effectively everywhere. As we reported earlier this month, the market drops have officially plunged the major stock market indexes into a Bear market cycle – meaning market prices have dropped 20 percent or more from recent highs. In fact, the opening to 2022 has been the worst 6-month start to a year for the U.S. stock market since 1970.

For now, there appears to be no reason for optimism that things will reverse course soon as the inflationary pressures are likely to stay put through the summer.

One of the more notable aspects of the market drops in the second quarter is how consistent and widespread they were felt around the world.

The S&P 500 (measuring the 500 largest U.S. publicly traded companies) slid 16.10 percent for the second quarter. Similarly, the Russell 2000 index (which measures smaller U.S. companies) fell 17.19 percent. And the MSCI EAFE (the index for developed nations in Europe, Australasia, and the Far East) dropped 14.29 percent. The closeness and severity of the declines are a good indication that the pressures being felt in the U.S. are the same pressures being felt in Europe, Asia, and elsewhere.

Unfortunately, the bond markets aren’t providing much protection from the market declines, either. Normally, bonds offer a conservative investment option during turbulent market periods. However, The Bloomberg U.S. Aggregate saw a decline of 4.69 percent – another sizable decline following the 5.93-percent drop bonds experienced in Q1. Though not as steep a percentage drop as the markets felt in the second quarter, they are the steepest bond declines experienced in many years.

* Each benchmark is allocated based on the assumed Risk Profile of underlying indexes.

**Benchmarks include a mixture of ICE BofA US 3-month Treasury Bill Index, Bloomberg Global Aggregate X-US Index, Bloomberg US Aggregate Index, Bloomberg Multiverse Index., Bloomberg US Credit Index, MSCI EAFE Net Index, Value Line Composite Index (Geometric), and the Cboe S&P 500 BuyWrite Index. These benchmarks are the same as those in the Risk/Return and Account Analytics sections of client quarterly performance reports. By comparing your portfolio’s return to the benchmark with the closest risk/return characteristics, you get a more accurate reading of portfolio performance than using a less diversified benchmark, such as the S&P 500 index.

ECONOMIC REVIEW

The primary drivers of the current inflationary period are the same as they have been for much of the year: Covid-induced labor and supply shortages, the impact on the supply of fuel and food as a result of Russia’s invasion of Ukraine, and the subsequent sanctions put upon Russia by many nations around the world.

At the height of the Covid pandemic, many workers who left the workforce have still not returned in adequate numbers in two key demographic areas. Those in the 55-65 age range who were in a good position to retire or semi-retire effectively did so and have been slow to return to the labor force. At the other end of the spectrum, many lower-end wage earners found it easier to survive off government relief programs, unemployment payments, and other credits. They, too, have been slow to return and many entry-level minimum wage jobs have had to increase starting wages to figures well above minimum wage to attract interest.

These labor shortages have created significant logistical bottlenecks in supply chains making inventory levels of many goods difficult to maintain. Adding to that challenge is China’s on-again/off-again complete lockdown approach to battling Covid within its borders.

Sanctions placed upon Russia – a significant exporter of oil and gas – have caused fuel prices to soar to record highs in recent months. Russia and Ukraine are also traditionally large suppliers of wheat. Without these resources, the food industry is experiencing additional challenges in its production chain.

To combat these inflationary drivers, the U.S. Federal Reserve is pulling on its primary counter-measure tool and raising the federal funds’ interest rate. In mid-June, the Fed raised rates for the third time this year – this time raising the bar 0.75 percentage points. It’s the highest single increase the Fed has applied since 1994 (the previous two increases this year were 0.25 and 0.5 percentage points respectively).

Given the mild impact that these increases have had on inflation thus far, it is widely expected that the Fed will increase rates again in July and September. More increases before the end of the year are certainly possible. The balancing act the Fed is walking is to avoid pushing its rates too hard, too fast, and pushing the economy headlong into a recession that it can’t quickly pull back from.

If there’s any silver lining to the current economic strife, it has allowed the U.S. dollar to strengthen against other world currencies. It’s not a huge benefit but it does make traveling more appealing.

For investors, the key is to remain patient and stay focused on long-term strategies and goals. Inflation, Bear markets, and recessions are just as much a part of the cycle as market booms and economic expansions. For our clients, we constantly monitor each portfolio and make appropriate investment maneuvers to meet the target risk/reward targets. If you have questions, please reach out to us to discuss and get answers.