market update

June 2022 Market Update

As summer unofficially started last weekend with Memorial Day, so starts what are usually slow trading days in the stock market.  Historically, summer has meant vacations for many on Wall Street, and that has led to lower volumes and markets that, despite heightened volatility, have often ended the summer on Labor Day at about the same levels as they started summer on Memorial Day.

That’s not always the case, such as with the big rally in 2020 coming out of lockdown.  I suspect that this summer will see heightened volatility, with mid-term election campaigns heating up (and the rhetoric around that), high inflation, high gas prices, and a war in Europe contributing.  Also, remote work capabilities have reduced the impact of vacation days.

Despite a small rebound in stock prices in May, it’s been a tough year in 2022 for most financial assets, with stock and bond indices being down for the year.  We usually don’t see that happen, which is why we encourage diversified portfolios.  Unfortunately, with bonds also being down this year, asset allocation hasn’t worked as well as intended.

The 10-year US Treasury bond yield may have peaked (yields move in the opposite direction of prices) for the year at around 3.2% in May.  This is important because if the 10-year yield did peak and will be flat or lower for the rest of the year, that could provide some relief for other rates, like mortgages.  It may also stem the tide of money fleeing from stocks and bonds, as more stability in bond prices might entice investors back to markets.

As for inflation, I think the “peak inflation” headline numbers may finally start to ease, but that doesn’t mean that inflation will end.  If prices rise at 5% rather than 6% going forward, they are still moving higher, just not at as fast a clip.  And right now, it’s hard to see what will bring gas prices down.  Maybe more production from the Middle East will help, and perhaps if the US Dollar isn’t so stubbornly strong that could help oil and gas prices to stop their ascents.  

There’s a great deal of fear around a recession, and I think that there is a better than average chance of a mild recession next year.  The definition of a recession is 2 consecutive quarters of US economic contraction, so it’s not the sort of thing you can know about until after you’re in it.  The economy has to balance growth and inflation. Push growth too high and, eventually inflation will get too high, too.   Like with driving a car, this trade-off works well for short periods of time. But if you keep the pedal down too long, adding too much fuel, then the engine (or in this case, the economy) will overheat. A recession often occurs after this overheating, which in turn lets the economic engine cool off and can reset growth and inflation expectations.

Remember, too, that recessions vary in their sharpness and duration.  Since the potential for one is so widely expected, perhaps corporations are taking steps now to lessen some of the pain. The main driver of the US economic engine, the consumer, is on a sound financial footing: household debt is down considerably from highs, and Americans generally have more in savings than before COVID.   At any rate, I don’t think that a recession is likely before next year if it happens at all.  Stay tuned, though.  

It appears that stocks, particularly high-quality, dividend-paying ones, could be a potential opportunity.  The market is punishing stocks that have no earnings and/or have high price-to-earnings ratios.  Some of them seem cheap, especially compared to where they were, but I’d resist the temptation to buy them just yet.  Stocks or companies with earnings are posting good results, so for now, their outlook is still favorable.  If I’m right about bond yields having topped out, now is an interesting time to be looking at fixed income, too. 

As I wrote last month, “for investors with a long-term time horizon, say three years and more, you can start putting money to work in stocks and bonds.  If you’re inclined to check your statement frequently, or if you will need some money from your account for a purchase, I’d suggest being patient.  While there will likely be ups and downs, the near-term trend for stocks is downward, and I’d respect that, for now.  Let’s hope it changes soon, but we probably need more clarity on China’s Covid response, the Federal Reserve’s stance on interest rates and inflation, and Ukraine before we get much upside traction.”  I think that still holds true.  We’re making lists of great companies that we’d like to own stock in, and we are prepared to buy them on pullbacks.  

In the meantime, I hope you enjoy your summer and try not to let the negative headlines worry you.  It looks like lots of people are planning to travel this summer, based on reports from hotels and airlines.  If that includes you, I wish you happy traveling!  If you do find yourself worrying about the headlines and would like a report on how your portfolio might be affected, please call your advisor and review your financial plan.  

The next market holiday is Monday, June 20 for Juneteenth, and then Monday, July 4 for Independence Day, so our offices will be closed in observance.   

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.

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.