The most volatile quarter since the 1970’s - Q2 2022 Review
We are conflicted to tell you that higher prices at the gasoline pump and grocery stores led to an acceleration in the price of energy and commodity investments for most of the quarter.
The Federal Reserve’s aggressive move to raise interest rates to combat inflation proved well for those invested in adjustable-rate or inflation protected bonds. Investors also flocked to Private Equity investments, which has little to no correlation to stock and bond market volatility. For certain investors, private equity may provide a solution in these uncertain times.
Outside of these bright spots, economic uncertainty continued. The Federal Reserve increased interest rates in May (50 basis points) and June (75 basis points) to combat inflation. This means the cost to borrow money from financial institutions to do business, finance the purchase of homes, cars and other major items, went up. Higher interest rates result in slower economic growth. Couple this with unresolved Covid-19 supply chain issues, higher oil prices, and geopolitical strife resulting from the Russia-Ukraine conflict, we have lots of uncertainty for the markets to attempt to digest. The S&P 500, NASDAQ, Russell 2000 and MSCI EAFE indexes all ventured into bear market territory in the 2nd quarter. The concern is that the Federal Reserve and Central Banks round the world will slow economic growth to a point that could cause a recession in the U.S., or globally. It is a fine balancing act in which history has shown the scale has tipped into the recession zone.
Not all market volatility in the 2nd Quarter was related to higher interest rates. April began with a new Covid-19 outbreak in China. The Chinese government locked down almost half of all cities in China causing major disruptions in manufacturing and trade. This exacerbated supply chain issues, leading to a spike in consumer prices and limiting inventories for all types of products.
The global markets continued to slide until the end of May when Chinese manufacturing and ports reopened. The markets breathed a sigh of relief with a short rally at the end of May as markets got a read of the possible length of the Fed’s rising interest rate policy, and supply chains out of China opened. This rally did not last long as the May Consumer Price Index (CPI), a measure of inflation, ramped up to a 40-year high. Thus, prompting the Fed to increase interest rates 75 basis points, the highest margin since 1994. All economic sectors sold off and set markets on a course correction back to late 2020 levels.
Markets stabilized during the second half of June. Commodity prices eased and economic conditions showed signs that inflation may be reaching its peak. Investor hopes grew in anticipation that the interest rate hike cycle would come to an end sooner than later.
The markets walked through its most volatile quarter since the 1970’s. Multiple factors caused investors uncertainty. From the highest inflation in 40 years, the Fed rapidly raising interest rates, recessionary risk, China shutting down its economy, and the Russian Ukraine geopolitical conflict. This all led to a sharp decline in stock and bond prices. These conditions have been painful.
As your advisor we look to bring a reduction of the risk that you would face if investing without management. We do this by diversification and seeking quality-focused investments verses traditional index style investing. We believe certain factors like strong free cash flow, healthy balance sheets (cash rich, low debt), positive earnings revisions, low volatility and non-correlated investment solutions all helped us weather the market conditions we faced.
We are committed to working with you to ensure the investment strategies we design are in line with an investors risk tolerance. If your circumstances have changed, or you need to reassess your risk tolerance to confirm you are invested in a strategy that is appropriate for your risk tolerance, please do not hesitate to contact us. Thank you for the opportunity to serve you.
Abundance to you,
Scott Miller
Partner
