08 Jul WealthSouth Market Update 07.08.22
WealthSouth Market Update 07.08.22
Dear Valued Client,
From bad to worse. This simple yet well-known phrase is typically expressed when a situation or event continues its negative trend with little signs of improvement on the horizon. That said, it’s the perfect phrase to define the transition between this year’s first two quarters.
With every inflationary data point touching 40-year highs, the term “transitory” began to leave the Federal Reserve’s vocabulary. Waiting for supply chains to resolve themselves or a diplomatic solution to arise out of Ukraine was no longer an option, so Jerome Powell and the Federal Open Market Committee’s hand was forced to use their most popular tool more often and by a larger amount than forecasted just a few months prior. Entering the quarter, the Fed Funds rate was in a range of 0.25%-0.50%, and as we begin the second half of 2022, we now stand at 1.50%-1.75%. It’s important to note that coming into the year, it was believed the Fed was aiming to increase the rates just three times, finishing in a range of 0.75%-1.00%.
The unexpected and rapid ascent of interest rates did not come without consequence. The S&P 500 struggled to keep up with the Fed as it was forced to continuously price in the higher interest rates and their effects on both the economy and markets around the world. All major indexes would continue their downward trajectory which would eventually be highlighted by the S&P 500 joining the NASDAQ in bear market territory, the second time this milestone would be breached since March of 2020. The popular index would eventually close out the first half of 2022 down 20.75%, giving us the worst first half returns in nearly 50 years.
In addition to equities, bonds, which trade inversely to interest rates, were no longer providing their hedge to stock market volatility to which we’ve become so accustomed. While the first quarter of 2022 provided the third worst quarterly decline in more than 40 years, this past quarter contributed even more pain, at one point falling approximately 12.5% before closing out the first half down 10.17%. This phenomenon, observing both stocks and bonds in a state of correction (down 10% from previous highs) simultaneously, is something we haven’t witnessed since 1976.
And finally, because of price increases across the board and the likelihood for a growth slowdown due to higher interest rates, we are starting to see the odds increase for a potential recession. Some believe we are already in one, while others forecast a 50% chance of a recession occurring within the next two years. While still mainly speculation, it has obviously garnered the attention of investors, as the 2-year treasury yield inverted with the 10-year, a sign that individuals are looking to flee shorter-term assets and camp out in those with longer maturities while the economy rides out the impending storm.
From an investment perspective there have been very few places to hide, particularly in June, with even energy names coming under pressure. We have garnered some downside protection from bonds, but with interest rates up across the board, they too are negative on a total return basis. Perhaps we are closer to full capitulation as market declines appear far more comprehensive than earlier in the year, of course only time will tell. The question now turns to downgrades in earnings and how slow the economy grows post interest rate increases (i.e. will the Fed be able to manufacture a soft landing?).
Seeing portfolio balances decline to these levels and for an extended period is difficult even for the most seasoned clients. With this is mind, we want to reiterate how WealthSouth has positioned portfolios and what, if any, action clients should take.
• Clients with balanced portfolios still have strong positive returns during the last 3 and 5 years.
• We have emphasized real assets (natural resources and commodities) in our portfolios since the COVID recession in 2020, which has offered much needed protection as inflation has taken off.
• Our focus on high quality companies, with reasonable valuations, dividends and dividend growth is holding up well in this type of market environment.
2) Portfolio Cash Flows
Baseline cash flows form a good underpinning for current cash needs and takes the burden off delivering higher growth needs in the short term.
• We position portfolios to provide for short-term funding needs with short fixed and bond maturities.
3) Recession Planning
• Similarly, we build our financial plans with these in mind.
• Further, we stress test our plans with conservative variables to give clients a greater sense of confidence when markets are volatile.
We hope this gives you some comfort as we all digest the barrage of the 24-hour news cycle. Please contact us if you have any questions. Our advisors have decades of experience and have navigated through the tech crisis, the Great Recession and the COVID impact. WealthSouth is prepared to assist you at times such as these. We appreciate you and wish you all the best this summer.