Kevin E. Donovan, CFA, and Parker G. Trasborg, CFP® discuss recent major headlines and what happened in markets during the second quarter of 2022.

Kevin E. Donovan, CFA
Kevin E. Donovan, CFAPortfolio Research Director
Parker G. Trasborg, CFP®
Parker G. Trasborg, CFP®Senior Financial Adviser

Parker Trasborg:

Hi, I’m Parker Trasborg, senior financial adviser at CJM Wealth Advisers. Joining me again today is Kevin Donovan, our portfolio research director, who will give our July 2022 Market Update. Kevin, unfortunately some of the causes that were dragging down the market to start the year in the first quarter have continued to persist here in the second quarter. All of the major market industries are down double digits, including bonds, for the first half of the year. Can you tell us a little bit more about what’s going on with performance?

Kevin Donovan:

Yeah. Well, I mean, the big story this year, of course, is inflation. We’re all feeling it. The Fed is doing what they can to fight it. Some people say that they’ve been coming in too late. We’ll see what happened towards the second half of this year with their efforts to kind of tame it. But it’s about inflation, concerns about the economy stemming from that, and COVID is still around. We’re seeing more infection rates in the US. It’s less deadly, thank goodness. But in places like China where they have adapted a zero COVID policy they are virtually shutting down cities and that is, in fact, impacting manufacturing, which is just feeding into that supply chain problems that we had when COVID first started two years ago.

So let’s take a look at the performance numbers now for the second quarter of this year. As you can see that the S&P 500 led the losses, it’s down 16% in the second quarter. International stocks measured by the MSCI Index was down 15%. The Dow Jones Industrials were down 11% and bonds were down 4.7%. So bonds lost a lot less than stocks but still to have stocks and bonds down in the same period that’s never a good thing for investors. We do have diversified portfolios, of course, and holding bonds will help lessen or cushion the losses that S&P 500 has suffered. But everything was down in the second quarter and there really was no place to hide.

If you look at the year-to-date numbers you can see, again, the S&P and international stocks were performing the worst, down 21%, so in a bear market. The Dow is 15% and bonds are down 10%. The S&P 500 number for the first half of the year, down 21%, that is the worst first half performance in any year since 1970. But if you look back at 1970 stocks recovered all of that loss in the second half and actually ended up; they ended up flat for the year. Now I’m not saying we’re going to see that this year. We would have to see a lot change, in terms of inflation expectations and inflation performance for anything like that to happen. But it’s interesting to see that stocks can have good recoveries, even from losses this steep.

Parker Trasborg:

Well we’ll certainly cross our fingers that the second half is a little bit better here than the first half. You kind of hinted at inflation before. Inflation remains stubbornly high and the Federal Reserve has had to get very aggressive in recent months trying to fight that. What are implications of the Fed’s actions here in inflation for investors?

Kevin Donovan:

Yeah. Just to give an idea of how aggressive the Fed has been initially they expected to increase interest rates by 25 basis points or one quarter of a percentage point each time they met this year. So they did that in March but then the inflation numbers still remained stubbornly high, so they went up to a 50 basis point or a half percentage point increase in May. And then just before their meeting in June, when they were expected to again increase by 50 points, inflation numbers came in really high again. And then there was a survey of consumers that showed that they inspected inflation to be high and persistent, and the Fed decided to get even more aggressive and increase interest rates by 75 basis points or three-quarters of a percentage point. They haven’t increased by that much since 1994, so that was a pretty dramatic escalation in their fight against inflation. Whether or not that will work we’ll have to see.

Oil prices have been coming down a bit but they are very, very volatile. They could just shoot right back up, based upon what’s happening in the world in geopolitics. We are seeing some declines in commodity prices from their peaks that they had earlier this year, but those really haven’t filtered through yet into the prices that consumers are paying; the things that we all buy. So we’ll see if that happens towards the second half of the year.

If that does happen maybe the Fed can be a little less aggressive. When the Fed raises by this much in such a short period of time though it has the impact of really slamming the brakes on the economy. And if they do that too far or too fast then it could have the possibility of tipping us into a recession. And we’re seeing that play out with stock prices right now. This is the reason why stock prices are down so much from the recessionary fears.

Now if we do go into a recession we may not necessarily see a further sell-off of this magnitude from this point. Usually when we enter a recession stock prices have already adjusted a great deal before that time because they were expecting the recession. So it can happen, we can see another leg down but right now we just don’t know. Sometimes removing the uncertainty of when we’re going to be in a recession, so knowing that we’re actually in a recession, is a positive for stocks because the stock market doesn’t like uncertainty and if we are certain that we’re in one, it sounds counterintuitive, but it could actually help stocks. So it’s happened both ways in the past where we have seen further losses in a recession or we’ve bounced back once we were in a recession.

So the market is a leading indicator. It turns before the economy does. So we’re still advising our clients to stay invested for the long term. Recessions are short term when compared to expansions. Expansions last much longer than recessions and the stock market over time, as you can see from any chart of a long-term performance, stocks go up over the long term over time.

Parker Trasborg:

Yep. It certainly does and it’s definitely a difficult period right now. And the Fed has its job cut out for it in trying to thread the needle here over slowing down the inflation numbers and hopefully not tipping us into a recession. Kevin, thank you very much for joining me today and for the reminder to everyone that it’s important to keep a long-term perspective on markets, and our overall planning goals and how it pertains to each individual person. Thank you all for tuning in today. I hope you all have a wonderful summer and we will see you next time.