In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
July Commentary & 2nd Quarter 2022 Recap
The combination of rampant inflation, rising interest rates, and dampened consumer sentiment have led to stocks and bonds having their worst 6-month start to a calendar year in decades. As concerns over COVID-19 dim, concerns over inflation and a slowing economy have gained steam. Many pundits believe that the stock market will retreat even lower, and that the U.S. economy is already in a recession.
After years of policymaking designed to prop up asset values, the Federal Reserve is now attempting to reverse course by raising interest rates and reducing their balance sheet to bring inflation under control. The greatest challenge (and biggest question) is, can the Fed curb inflation without causing a recession? We think the answer is no, considering the U.S. already had negative GDP growth in the 1st quarter of 2022. If GDP figures are negative again in the 2nd quarter, we will officially be in a recession.
Looking at the US Consumer Confidence Index, it has declined for two consecutive months and now stands at its lowest level since February 2021. Interestingly, prior to COVID-19, the last time the CCI was this low was in late 2016. Perhaps of greater note, the “Expectations Index”, which measures consumer’s short-term outlook for income, business, and labor conditions, took the sharpest decline and is at its lowest level since March 2013. This is no surprise, given that Americans have also had to grapple with the war in Ukraine and price surges in oil, food, & housing.
Since reaching an all-time high on January 3rd of this year, the S&P 500 has dropped by 23%. While the bond market often provides relief when stocks are losing money, the Barclays U.S. Aggregate Bond index is also down over 9% year-to-date due to rising interest rates. Other traditional safe havens like cash and gold are also in decline this year. Cash is losing value in real terms due to inflation, and even gold hasn’t been immune to losses in 2022.
In client portfolios, we have done some selective rebalancing. We continue to prefer high-quality, dividend growth stocks, mutual funds, and ETFs as the core of client portfolios. We are optimistic that this tilt toward predictable, resilient, and financially healthy companies with strong balance sheets and growing dividends will pay off for clients in the long run.
We continue to prefer bonds with high quality and stable credit ratings on the shorter-term end of the spectrum (less than 5-year maturity), floating rate bonds, and treasury-inflation protected bonds. This bond allocation should help insulate client portfolios and will allow clients to reinvest sooner for higher income if interest rates continue to rise.
The Fed has begun their long-awaited (and long overdue) tightening cycle to reduce inflation. Slowing demand and low consumer confidence may exacerbate the current market decline and push us into recession. While this is likely to strike fear in many investors, it’s important to remember that the great investors view this as a buying opportunity, and we do too!