Market Commentary - July 2022

For your convenience, below are a few summary highlights from our Investment Strategy Group’s Quarterly Market Commentary for July 2022:

1. 2022 has been a very challenging year in both equity and fixed income markets. The domestic equity markets reflected by the S&P 500 Index and NASDAQ are down 20% and 26% respectively; making this the worst first half of any year since 1970. Furthermore, domestic fixed income as reflected by the Bloomberg US Aggregate Bond Index declined by 10%, making this the worst first half ever experienced. This selloff was experienced globally, with international markets as defined by the MSCI All Country World Index Ex-US index seeing declines of 18%.
2. The global pandemic, the War in Ukraine, the China Covid lockdowns and continued supply chain disruptions are the primary contributors to the economic backdrop that has resulted in elevated levels of inflation. This has shifted global economic policy and has put the Federal Reserve on a path to swiftly raising interest rates. The subsequent consequence of this has been a rerating of asset prices across equity and fixed income markets.
3. As a result of the correlations experienced between stocks and bonds during the 2022 market decline, diversification did not result in the historical mitigation of portfolio risk—something rarely experienced.
4. Despite the sweeping decline across markets, the fundamentals of the US economy remain strong. Nominal US GDP is expanding at an annualized rate between 7-9%. US unemployment is near historic lows at approximately 3.6%, with 11 million unfilled jobs currently available. Consumer and corporate balance sheets remain strong (corporate profits continue to expand in 2022), and housing continues to be resilient; median home prices recently reached the highest level in history.

Looking ahead:

1. Our base case view is a slowing of nominal GDP growth but not a contraction. Therefore, we do not anticipate a near-term recession. Historically, the backdrop prior to a recession has seen a dramatic weakening in employment, declines in consumer spending and demand, a slowing of corporate activity and an inverted yield curve (expressed by the yield on the 3-month Treasury being higher than the yield on the 10-year Treasury). Currently, none of the aforementioned points are present.
2. We anticipate that inflation will begin to plateau, and more favorable trends will start to take hold, setting up conditions for a more sustainable economic backdrop. We are likely to see a decline from current levels of inflation in the second half of 2022, as expressed by CPI.

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