This has been a disappointing year in the markets thus far. We all know markets go through cycles, which means we will see down periods. Nevertheless, it’s never pleasant to experience a market correction. We saw continued weakness in major U.S. markets and lower U.S. government bond prices (pushing yields higher) as persistent inflation and supply chain bottlenecks continued to weigh on the global economy. The S&P 500 ended the first half of the year at -19.96%, while value stocks continued to fare better with the Russell 1000 Value Index, ending at -12.21%. The bond market provided little relief with the Bloomberg Bond Aggregate ending at -10.35%.
Slowdown Signals
The markets send signals, and we’re tasked with digesting them. Looking across equities, commodities, currencies, and bonds, it seems that markets are signaling a potential slowdown or recession—at least based on the first half of 2022. A shift in consumer spending, higher wages, rising transportation costs, and supply chain difficulties have begun to erode corporate profit margins. In addition, consumer sentiment has soured, and U.S. manufacturing is slowing. Fortunately, even with a pessimistic consumer and a challenged corporate environment, wage growth has been solid and payrolls remain strong while unemployment is still low.
Inflation & Interest Rates
The Federal Reserve is battling inflation via rate hikes, and there are signs that it could be working. At the June meeting, the Fed increased the overnight lending rate by 0.75%, the largest hike since 1994. The recent increase places Fed funds between 1.50% to 1.75%.
Looking ahead, it is estimated that the Federal Funds lending rate will be near 3.4% at the end of 2022 and 3.8% in 20231; some analysts are calling for rate cuts in 2023. Future rate cuts would be a logical step once inflation is under control and out of the way if we were to enter into a recessionary or slowing environment.
The rate on a 30-year mortgage reached 5.94% in June compared to 3.25% a year earlier. Housing remains strong even as inventories rise and higher borrowing costs slow the pandemic buying frenzy.
Interest rate increases are a positive for savers. We are beginning to see higher interest rates on savings vehicles like money markets, CDs, and short-term bonds. Contact us if you would like to discuss your short-term savings needs, and we can explore options.
Looking Ahead
June featured a tone of anticipation leading up to the Fed’s historic rate hike. Now that a 0.75% rate hike is in the books for June, attention turns to the July Fed meeting. At the time of writing this, markets show an 85.6% probability for another 0.75% rate hike in July.
As time passes, we will be able to get a better picture of the rate hikes’ impact on inflation. We’ve seen commodity prices soften over the last month, with notable declines in copper and natural gas prices. This month, market participants will be keeping tabs on unemployment numbers, set to be released in early July. Though unemployment was a steady 3.6% at last read, higher interest rates have historically correlated to higher unemployment.
It has been quite the year thus far with downside volatility in equities, rising interest rates, and inflation. Pragmatically speaking, this is part of typical economic cycles, albeit this correction is a bit overdue and perhaps exacerbated by pandemic excesses and high inflation.
Market cycles are full of ebbs and flows that long-term investors are accustomed to, allowing them to reach long-term goals. With that said, we recognize the ebbs can be intimidating and stressful for many, so please do not hesitate to reach out if there is anything on your mind regarding the markets or your long-term strategy.
Charles Schwab Transition
You may be aware that Charles Schwab purchased TD Ameritrade, and your account(s) will be custodianed at Charles Schwab once the transition is complete. We expect this to occur in mid-2023. We don’t expect any significant changes, but there are a few housekeeping tasks given the differences in systems between Charles Schwab and TD Ameritrade. Please watch for notices related to your account(s) and reach out to us with any questions you may have.
The most notable change is that many clients will need to create an online ID. You will be switched to mailed statement copies for any accounts not covered by an online ID. Please note that each spouse must each have their own online ID. You can combine viewing on one party’s ID and solely use that one for your day-to-day needs, but you do need to create an ID for each person. ID creation requires your account number and a text sent to the phone number on record for verification purposes. You can create your ID at:
advisorclient.com/login/getstarted
Please let us know if you need our assistance with this process.
Footnotes
- https://www.cnbc.com/2022/07/01/fed-could-cut-interest-rates-in-2023-analysts-say-after-rate-hikes-this-year.html
- https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.