First Half of the Year in Review
by Zach Marsh on Jul 8, 2022
Last week we closed the door on the first half of 2022, and from a market perspective the end couldn’t come soon enough. Here is a rundown of the performance of major assets:
S&P 500 -19.45%
7-10 year US Treasury -11.17%
20+ year US Treasury -21.08%
Nasdaq 100 Index -28.86%
Russell 2000 Index -22.59%
Vanguard REIT ETF -19.15%
As you can see, across most major assets the first half represented a relative blood bath. No amount of diversification could shelter one’s portfolio from sustaining losses. From an historical performance standpoint, the first half represented the worst 6 months for a traditional 60/40 portfolio. US treasury bonds had their worst start to a year in over 150 years. Inflation rose faster than at anytime since 1982. The Federal Reserve, desperate to bring inflation under control, raised rates at their last meeting by 0.75%, the first time it raised rates by that much since 1994. Financial markets now find themselves stuck between a rock and a hard place, with the understanding that the only way out of the inflationary trap is by sending the economy into a recession. The only question is how deep the recession will be.
Today’s US employment figures were released this morning and showed that the economy added 372,000 new jobs. This should normally be construed as positive news, but the market has been looking for reasons to believe the Fed is closer to the end of its rate hiking schedule and numbers like this show that they may have a long way to go. For the moment the market remains trapped in this dilemma—it has fallen quite a bit from the all-time highs, market participants want to believe there is room for the market to recover, but the impact of Fed rate hikes has yet to materialize in economic numbers and forward corporate earnings will need to be lowered. Should the earnings adjustments be small and should inflation fall faster than currently expected, the stock market should recover. However, should the opposite be the case I would expect the stock market to continue to struggle, but I would foresee an opportunity for long-term bonds to recover.
If a “hard landing” recession takes hold long term rates will start to fall which will help the performance of longer dated maturity bonds. The scenario for stocks to outperform would have to be a small dip in economic numbers with a big dip in inflationary pressure. On way or the other it seems that the 6-month correlation between stock and bond prices should begin to break the other way which will dramatically improve the returns of diversified asset portfolios.
Thanks for reading,
Zach and Dave
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