Update on the Markets:

Index	2nd Quarter 2022	Full Year 2022
S & P 500 (Large US Stocks)	(16.10%)	(19.96%)
Russell 2000 (Small US Stocks)	(17.20%)	(23.43%)
FTSE All-World ex-US (International Stocks)	(13.56%)	(17.95%)
Barclays US Aggregate (Bonds)	(4.69%)	(10.35%)

July 2022

Key takeaways

► Awful start to the year

► It’s all about inflation

► How far will the Fed have to go?

► Some good news

► A general unease setting in

Another lousy quarter for stocks and bonds

I don’t need to tell you that it’s ugly out there. As you can see in the chart above, the second quarter was another awful period for stocks and bonds. The S & P 500 plunged into bear market territory – falling over 20% (in Wall Street parlance, a drop of 20% or more is considered a bear market). It’s the worst first-half performance since 1970. Bonds continued their slide, with yields on the 10-year US Treasury more than doubling (bond prices move in the opposite direction of yields). Headlines shout out:

• Worst stock market since 1970
• Highest inflation since 1980
• Tech stocks implosion reflects the early aughts
• Fastest drop in bond prices since the 80s

And the crypto universe has collapsed, with some firms in bankruptcy. Bitcoin is below $20,000, a fall of over 70% from its high of $68,000 per coin in November 2021. In this so-called crypto winter, surviving firms are finding opportunities to buy distressed competitors and consolidate the industry. Fiscal discipline and regulation out of Washington are in order. Crypto’s future is uncertain.

Inflation and the Fed
Inflation reached 40-year highs in May as prices rose 8.6% from a year ago. Inflation is present in almost all sectors of the economy, flowing through to companies and consumers. A new wage-price cycle may be starting, squeezing company profit margins, and decimating consumer budgets. The culprits: rising interest rates, Fed tightening, China Covid lockdowns, supply disruptions, and the war in Ukraine.

The Consumer Price Index

With inflation raging forward and the Fed determined to reign it in, the biggest concern on investors’ minds is: “How far will the Fed go to get inflation under control? Is a recession necessary to tame inflation? Will Fed Chairman Jerome Powell remain resolute in raising interest rates despite a weakening economy?” Talks of a soft landing, a scenario where the economy cools enough to reduce inflation but not go into contraction, are dissipating. Inflation is too persistent.

There is some good news as there are signs that we may be at a tipping point. Some prices are beginning to drop. For example, Reuters reported that US gasoline prices are finally falling after exceeding $5 per gallon. The average retail price for gasoline nationwide is still $4.631, down from a record of $5.014 a month ago, but still $1.485 higher than a year ago., according to the American Automobile Association. Fears of a recession have caused energy futures to fall. Prices for smartphones and TVs are also dropping. As Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, recently noted: “High prices are the cure for high prices.” Consumers are reducing demand for autos, furniture, home improvement, and general retail. Inventory is piling up, and prices need to be reduced to clear merchandise. Think Target. The Conference Board Consumer Confidence Index decreased in June for the second straight month. The Index fell to 98.7, down 4.5 points from 103.2 in May, and now stands at its lowest level since February 2021.

An unease across the land

A general sense of listlessness has befallen the country. Not a panic or depression, just a feeling that things are not quite right and may not be right for a while. The economy is healthy and the labor market strong. And consumers have money to spend. However, many feel that bad times are coming. Investors’ portfolios have dropped significantly. A bag of groceries takes a bigger chunk out of our monthly budgets. Travel is back but expensive, and flight delays and cancellations have tempers flaring. Gun violence continues. Crime is pervasive in our cities. The war in Ukraine drags on. And Covid is still with us. It does feel like the 1970s.

What to do?

As always, take the long-term view. Patience is your friend. Avoid watching the day-to-day price action. Instead, maintain your current asset allocation for monthly contributions to your retirement plan. Ride it out. If you need cash in the next six to twelve months, I recommend taking it now. A great place for short-term savings is online banks such as Capital One, CIT Bank, and Discover. Yields on savings accounts start at 1.00% and go as high as 1.65%. Make sure your online bank is FDIC insured! You may also want to look into purchasing I Bonds from the US Treasury. I Bonds are Treasury bonds that pay a fixed rate of interest as well as another layer of interest that varies with inflation as measured by CPI. The current yield is 9.62%. You can buy I Bonds at TreasuryDirect.gov. Maximum is $10,000 per year plus an additional $5000 through your federal income tax refund. Terms and conditions apply.

For active investors, keep a healthy stash of cash for better opportunities later this year. Stocks have fallen a lot but they’re still not cheap. The price-to-earnings ratio (P/E ratio) of the S & P 500 index is around 19 and the historical median is around 15. Midterm elections on November 8 may help as investors love divided government and it looks like the Democrats will lose the House of Representatives. Stick with value stocks. Buy quality companies with solid balance sheets and a history of increasing dividends. Stay diversified across all asset classes.

Please let me know if you have any questions or concerns.

Enjoy the rest of the summer!

Sincerely, 
Henry 

Henry Gorecki, CFP® 
HG Wealth Management LLC 
401 N Michigan Ave, Suite 1200
Chicago, IL  60611
312-723-5116