Market Update July 19, 2022
A funny thing happened last week in the financial markets. On Wednesday, July 13th, we had another sizzling inflation report showing inflation as measured by the Consumer Price Index was up 9.1% last month. This was the highest reading in over forty years. The previous month’s inflation report came in at 8.6% and resulted in a steep sell-off of both stocks and bonds. With inflation running high, it is expected that the Federal Reserve will need to aggressively raise interest rates to reduce demand. This could in turn weigh on stock and bond prices. So how did stocks and bonds react to last week’s report? Very well with the financial markets little changed by the news, and stocks up nicely since then. It is often a good sign when markets no longer react badly to negative news as this can be an indication that market prices already reflect dire expectations. Sentiment among both large and small investors is terrible and at levels commonly seen around market bottoms.
It is no wonder sentiment is so poor. Domestic stocks as measured by the S&P 500 were down 20% year to date through June. In U.S. Dollar terms, established foreign stocks as measured by the MSCI EAFE index were down 19.6% and the MSCI Emerging Market index was down 17.6%. In local currency terms, these two foreign indexes were down “only” 10.9% and 13.5% respectively. A strong U.S. Dollar has thus far weighed on foreign stock performance this year for U.S. investors.
While volatility in stocks is largely expected by investors, the downturn in bonds has been historic. Bonds as measured by the Bloomberg U.S. Aggregate index were down 10.4% through the first half of the year. I have read that this has been the worst start to a year in history though I have not seen data confirming this. I have seen data showing this year’s intra-year decline as being the worst going back to at least 1976. As I noted in my letter back in January, long term bonds are very vulnerable in a rising interest rate environment as we have now seen.
Somebody once said when the market gives you lemons, make lemonade. In the lemonade category, weak markets do provide financial planning opportunities. For clients in higher tax brackets with taxable investment accounts, the downturn has provided us an opportunity to realize some losses to offset taxable gains. Times like this can also be an opportune time for some investors to convert traditional IRA assets into Roth IRAs depending on their specific circumstances. And, this is also a good time to be funding retirement plans for investors still in the accumulation phase of their investor lifecycle. All eyes will be on the Fed next Wednesday as they announce their changes to the Federal Funds rate. After last week’s inflation report expectations briefly rose that they would increase the rate by 100 basis points (1.00%) instead of 75 basis points (0.75%). This would follow the path of Canada which last week raised their policy rate by a full percentage point. Many commodity prices are starting to come down which should portend lower inflation down the road. While we will certainly have a recession again someday, at this point I don’t see it with two job openings for every unemployed person and the 10-year/3-month Treasury yield curve being positive. Non-recessionary bear markets have historically been short-lived.
Periods of market volatility can understandably be trying for investors. However, as holding periods get longer the likelihood of having a negative return goes down. This can explain why people who have been investing for many years generally tend to be less emotionally impacted during downturns than investors with a shorter history. Providing an investor does not need a sizeable portion of their investment portfolio soon (in which case they shouldn’t be invested in stocks or longer term bonds in the first place), waiting out downturns has been the best course.
If you have any questions, concerns, or anything we might be able to help you with, please do not hesitate to give me a call.
Sincerely,
Glenn S. Rank, CIMA® Certified Investment Management Analyst® President
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· The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Bloomberg US Aggregate Bond index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S.. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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