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Q2 Market Update

In November of 2019, I had the opportunity to visit the JPMorgan Headquarters in New York for a conference and attend an economic update by one of my favorite economists, Dr. David Kelly. His presentation was being prepped to begin and was titled something like “2020 Vision: Insights for Next Year”. Looking back, in what can only be described as a combination of a humorous and foreboding moment, one of my contacts fell out and I was left with very blurry vision for what would be Dr. Kelly’s presentation. While I currently have both contacts in and can see correctly, I’m sure we all feel somewhat like I did in that moment right now as we look towards the end of the year.  

To grasp what the future might look like, let’s start with looking at what has happened so far in 2022. Through June 30th, 2022, the S&P 500 is down about 21%, while the NASDAQ is down more, and the Dow Jones is down slightly less. Bonds have not faired much better with the US Aggregate Bond Index down over 10% as the 10-Yr US Treasury nearly doubled from 1.6% to 3.0%. Remember, as bond yields rise, prices decline. About the only things that seem to have gone up in the first half of the year is energy prices, home values, and inflation, but even home values seem to be leveling off a bit, leaving us with what feels like only the wrong things going up.

The natural question to ask next is “How did we get in this situation?” The actual answer to that dates back to the Covid response in 2020 and 2021 but has been amplified by events over the past twelve months.

Following the almost complete national shutdown in March, April, and May of 2020, the US Government put policies in place to support those who were out of work and were affected by the shutdowns. Stimulus checks, the Payroll Protection Program, and the many different funding facilities the Federal Reserve created buoyed the economy and the US Consumer during at an unprecedented level to deal with an almost unprecedented crisis. The goals of these programs were simple: keep consumers spending money, keep businesses open, try and limit unemployment, and keep banks loaning money. Fortunately, these programs did work and supported many Americans. Unfortunately, there were unintended consequences that we are now dealing with.

As Americans, most of us like to spend money and even though many people struggled with the economic fallout from Covid, many of us used the stimulus to our advantage. New cars, clothing, and electronics were purchased. Once travel restrictions eased Americans began spending heavily on vacations, concerts, and other leisure events too. Meanwhile, supply chains were still constrained which led to a perfect storm for inflation. There was, and still is, a lot of dollars chasing too few goods which causes inflation. At the same time, the cost of producing goods rose as wages increased and material prices rose. The Russian invasion of Ukraine only complicated matters more. In attempt to fight inflation, the Federal Reserve began increasing interest rates and began “quantitative tightening”. The goal is to reduce demand for goods and services, hopefully allowing supply chains to catch up, and inflation to fall. Unfortunately, this mix of inflation and interest rates led to a sell off of both the equity and fixed income markets, leaving many portfolios lower than what may normally be expected.

As we look forward to the second half of 2022, there is still the issue of inflation present, but there is reason to be optimistic. First, US Consumers seem resilient. Data for airlines, hotels, and other areas of discretionary spending are still strong. Next, while we have seen more hiring freezes, the labor market is still strong. According to the Department of Labor, there are two open jobs for every American looking for one. Additionally, many commodities like copper, gold, oil, wheat, and steel have all turned lower to start July. If that pattern holds, we could see inflation began to taper downwards and level off. Finally, the housing market looks to be easing. Prices rising rapidly for homes is great if you’re the homeowner, but difficult for buyers. A more stable increase in home prices will allow for wealth to grow, but also allow buyers to spend in areas other than their mortgage which is crucial for a healthy economy.

We still believe the best key to financial security is a sound financial plan paired with a diversified portfolio. For the first time in many years, not only are equities attractive, but so is fixed income.  If you are concerned or feel like you have some blurry vision on your financial plan, contact your advisor at CandorPath for a deeper discussion about your current situation and ways we can help you feel more sharp and secure in your future.