Market Update

July 2022 Market Update

As we head into the second half of 2022, I wanted to take a moment to look back on what we have come through.  For starters, the first 6 months of 2022 were the worst January-June period for the stock market since 1970.  On top of that, US Treasury bonds, which are usually a safe haven in times of stock declines, lost about 11% in the first half, according to an ICE Bank of America index that tracks intermediate-term Treasury bonds.  Let’s don’t forget inflation, which by many measures has risen at its fasted pace in about 40 years.  Unfortunately, this all adds up to pretty miserable investment markets so far in 2022.

There really have been few places to hide, since bonds haven’t played their traditional role.  Investors in oil and gas-related companies have generally done well, and many chemical and agricultural-related stocks have outperformed.  Those are small segments of the investment market, though, so they haven’t been able to keep most investors’ heads above water.

Going forward, we are still in a downtrend for stocks, so I recommend that investors be patient and judicious.  I am cautiously optimistic that bond yields have peaked, at least for now.  This could translate into higher prices for bonds (bond prices and their yields move inversely), so bonds could finally provide some benefit to portfolios.  Additionally, lower yields could translate into lower mortgage rates and other lending rates, making houses more affordable.  Unfortunately, if bond yields do head lower, it could be a sign of an impending recession.

I stick by my previous thought that we will have a recession in the US.  I expect that it will be next year, although there is a growing chance that it will be this year.  The real question is how deep the recession might be.  I have the feeling that it will be mild, although it could linger.  So, maybe it’s not too painful, it will just take a while to work through the economy.

The Federal Reserve has begun reducing the number of bonds that it owns and is raising short-term interest rates.  This is part of their plan to take out some of the frothiness from the investment markets and the economy by controlling inflation and liquidity.  In my opinion, this is a condition that they created, along with the help of the US government, by keeping interest rates too low for too long and by issuing too many stimuli.  We needed some help getting through COVID, but it is apparent that the government and the Federal Reserve went overboard.  All of that stimulus, combined with factory shutdowns and shipping troubles, meant that a lot of money was chasing fewer goods.  When that happens, it is very likely that inflation will follow.

So, what’s the playbook for now?  I believe that inflation will moderate, and we may even start to see the prices of some goods fall over the next year.  I think that the bidding wars we hear of for real estate will stop, and home values will stop increasing at a rapid rate.  They may even not rise at all for a while.  My understanding is that there is a housing shortage, and, for that reason, I don’t think that we will see home prices crash, although some geographical regions will fare better than others.  As I mentioned, I think bond yields may stop rising, and maybe even fall.  This would make bonds a good investment. 

For stocks, a lot of the damage has been done, but I’d still play defense.  If you have a long time horizon, 3 years or more, make a list of great companies that you want to own shares in and buy them when their prices pull back.  I think dollar-cost averaging (DCA) makes a lot of sense, a strategy whereby you add money into stocks on a regular basis, say monthly or quarterly.  This way, you spread your investments out over a period of time, rather than putting your money to work all at once.  This doesn’t ensure a gain or prevent a loss, but it will probably make your investment returns smoother and may keep you from trying to time the market. 

If your time horizon is shorter, or if you are prone to get upset by your monthly statements, I’d advise that you be more patient and defensive.  Stocks that pay dividends make sense to me since an investor gets the cash flow from dividends, and since regular dividend payment often indicates the financial strength of the company.  

Bear markets like the one we are in when the stock market goes down by more than 20%, can be tenacious, and often have big rallies, or upswings, in which investors get fooled into thinking that the bear market is over.  These rallies have produced some of the best days in stock market history, so you must be careful about trying to time the market and missing those big rallies.  In addition to everything else going on, this is a mid-term election year, and the results of the races could provide a catalyst for stocks to move higher as well as add volatility.  

In the end, know that bear markets can and do happen.  Bear markets also tend to be common-this is the 3rd one since 2018—and over any given 50-year time frame an investor could expect to see about 14 bear markets.  I have attached a nice report from Hartford Funds for your reference.  They are no fun but are a necessary part of the cycle.  Without bear markets, there would not be bull markets!  There is a playbook for dealing with them, so feel free to call your advisor to discuss strategies.

Meanwhile, I hope that you enjoy your summer!  It appears that there are lots of vacation trips scheduled, judging by the activity on the highway and at airports.  Whether you are traveling or having a “staycation,” I hope you have some time to relax, turn off the TV news, and disconnect for a while.  

As always, these opinions are mine, and may or may not be the same as those of Raymond James.  This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur.  Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.  There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. 
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index.   The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.  The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. U.S. government bonds and Treasury notes are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury notes are certificates reflecting  intermediate-term (2 – 10 years) obligations of the U.S. government.  Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. 
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Scott Mitchell and not necessarily those of Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  Raymond James does not provide tax or legal services.  Please discuss these matters with the appropriate professional.
Dollar-cost averaging cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.Ýividends are not guaranteed and must be authorized by the company’s board of directors.

About Scott Mitchell

AAMS ®, Chief Investment Officer SWG, Senior Wealth Advisor RJFS, Scott is a cum laude graduate of Wake Forest University School of Business. He received additional training from the College of Financial Planning and earned the accreditation of Accredited Asset Management Specialist℠ as well as earning the Accredited Investment Fiduciary® designation.  Scott began his career at Southern National Bank. He then joined his father, Bob Mitchell, at First Union Securities for six years. At Signature, Scott directs investment strategy for the team and oversees the research and management of individual stocks, bonds and mutual funds. Scott lives in Florence with his wife and two children. He is a member and past President of St. Luke Lutheran Church, member and past President of the Florence Rotary Club, and on the board of directors of the Pee Dee Area Big Brothers and Big Sisters. Follow Scott on LinkedIn. Raymond James is not affiliated with any of the above-mentioned organizations.