by Jeremy Bryan

Stocks came out strong in January as attitudes regarding the economy and corporate earnings began to strike a more positive tone.  While it can be argued that not much has changed from a data perspective, investors clearly have reacted differently, and that sentiment change has driven markets higher.  

Based on recent economic data, the US economy is remaining resilient.  Gross Domestic Product (GDP) reflected continued growth in the US economy, unemployment rates remain near 50-year lows, and recent inflation trends have suggested the worst may be behind us. 

Typically, investors aren’t as concerned about what has already happened, but what is ahead.  It has largely been assumed that economic data on US growth and jobs would begin to slow.  The concern is whether the actions undertaken to slow inflation would lead us into slower growth but no recession (“soft landing”) or place us into recession (“hard landing”). 

Corporate earnings reports and the outlooks from companies for the year ahead will be closely monitored to give investors insight into the health of the economy and the possibility of a recession.  Clearly, there has been a slowing of activity in certain segments, with many companies in the technology space announcing layoffs after several years of aggressively hiring to support growth.  Other industries are expressing prudence and caution, but many have also suggested that the strength in the job market has kept the US consumer active and spending. 

From the stock side, the lack of significant deterioration and the higher potential of a “soft landing” has provided the backdrop for a January rally.  Further, many of the stocks and sectors hit hardest by the decline in 2022 have reversed trends in January and have been very positive.  The Nasdaq index, which is comprised of growth stocks, had a difficult 2022 but had the strongest rebound in January.  Small cap stocks were also significant performers during the month after a difficult time last year. 

Bond performance also rebounded in January after experiencing one of the worst years in history.  Long term interest rates declined, which provided the largest buoy to bond performance during the month.  Finally, alternative assets like gold and real estate also had strong months as investors began to re-engage across asset classes.  The question is, after a strong month, can we sustain this rally for the year?  Historically, a strong January tends to have a positive correlation with above average returns in markets.  Second, it is a rare event that stock markets experience back-to-back negative years, last happening in 2000-2002. 

Also, the current consensus expectation of a recession is not a great predictor of market performance going forward.  In our opinion, the logic follows that if something is widely expected, the realization of the event should not be a terrible surprise.  So, if we were to slip into a very short and shallow recession in 2023 with a period of slight decline and job loss that doesn’t exceed 6%, it is our opinion that the bottom of the market may already be in place, and we could have already started toward the next bull market. 

We would caution, however, that this doesn’t mean there aren’t concerns in the market, nor does it mean that volatility is a relic of the past.  Inflation trends are getting better, but that doesn’t mean they can’t revert.  Company outlooks have been prudent, but that doesn’t mean they can’t worsen.  Job loss, and consumer worries about their jobs, could have a negative effect on spending.

This is why we balance our optimism with prudence.  This is done by advocating for a blend of growth and safe assets, and having an investment plan that is oriented around your long term objectives and risk tolerance.  Markets are incredibly hard to predict from year to year but staying invested through the bad times to be rewarded by the good times remains the best way to achieve the goals for your money. 

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Both stock and bond markets rallied in July despite economic data that reflects softening conditions and continued high inflation. Investors were encouraged by company earnings reports that showed a less bleak picture than feared. Overall, while we are certainly not out of the woods completely, the trend in July was better than the difficult markets experienced year to date through June.

Stock markets staged a rally in July with the S&P 500 and Nasdaq up more than 9% and 12% respectively. International stocks were mixed as developed markets were positive while emerging markets were slightly negative. Despite the significant rally during the month, both US and International markets have had negative performance over the past year.

Bond markets experienced a rally in July as well, with the Bloomberg Barclays Aggregate Index up over 2%. The performance was driven by a precipitous decline in the 10-year US Treasury Rate which fell from a recent high of 3.49% on June 14, 2022 to 2.67% by the end of July1. When interest rates are declining, bond prices typically rise. Similar to the stock market, the bond price rally in July was strong, but the yearly performance is still negative as interest rates remain significantly higher than this point last year.

With regard to the economy, the early data on inflation in July was not promising. The inflation rate came in at 9.1%, a new 40-year high2. Inflation remains the number one concern of investors, but the recent discussion points have shifted. The concern isn’t as much regarding demand and the elevated prices themselves, but rather how these price increases will slow demand while the methods used to control inflation (raising interest rates) will be so aggressive that it will send us into recession. This concern was further exacerbated by the most recent GDP report, which showed a second straight quarter of decline3. This is not the official determinant of a recession, but two quarters of GDP decline has been a rule of thumb to reflect past recessions.

Contrary to economic data, corporate earnings have been a little better than expected and certainly better than the sentiment of investors going into earnings season. As of 7/29/22, 56% of the S&P 500 companies have reported earnings for the second quarter. Of the companies that have reported, 73% have exceeded their estimates of earnings for the quarter. Currently, the expectations for earnings growth in 2022 and 2023 are 9% and 8% respectively4. If this growth rate proves accurate, this is a relatively healthy backdrop for stocks.

In short, there are currently conflicting signals between trends in the economy and the trends in corporate earnings. Also, after a period of significant decline and subsequent rally, there are always questions about whether this was the beginning of a new bull market or just a short pause in a prolonged bear market. While we never know with certainty ahead of time, there are early signs that give us some hope for the future. Price declines for things like gasoline, corn, and wheat – which have a direct influence on consumer pocketbooks – are a positive sign for consumer’s ability to continue to spend to support the economy. We continue to listen to company analysis on their current earnings but, even more importantly, what they are discussing with regard to outlooks for the remainder of the year. Lastly, we are watching for any changes to a strong job market and the effects of pricing on consumer behavior.

Even if this period is determined as a recession or not, stock market investors are always focused more toward the future than the past. While we never know the absolute bottom in advance, history would tell us that the companies in the US market are adaptable, efficient and have weathered storms in the past and come out stronger on the other side. Therefore, investors who are patient, prudent, and have a well-defined investment plan are rewarded over the long term.

https://fred.stlouisfed.org/series/DGS10

https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html

https://finance.yahoo.com/news/q-2-us-gdp-gross-domestic-product-economic-activity-123214911.html

https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/

Earnings%20Insight/EarningsInsight_072922.pdf

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

April 2022 was not kind to either bond or stock holders.  Stocks were down significantly, and in what has been a pattern this year, bond markets did not provide any relief and were down as well.  The predominant concern of the market remains inflation and is causing consternation regarding future economic health, the consumer’s ability to spend, and the actions of the Federal Reserve needed to control rising prices. 

The S&P 500 index was down 8.72% in April, the worst month of performance since March 2020.¹ Many of the underlying stocks have experienced performance far worse than the overall markets in 2022, especially stocks in the once high-flying growth space.  Companies that were considered beneficiaries of the COVID shutdown have experienced a very difficult 2022, with companies such as Peloton (PTON), Zoom Video Communications (ZM), Netflix (NFLX), and Teladoc (TDOC) each down 45% or more year to date.² 

Bonds, once again, failed to provide respite from the difficulties in the stock market.  The Barclays Bond Aggregate Index (a widely used measure for the bond market) was down 3.79% in April and is now down 8.51% in the last 12 months.  The bond market just experienced the worst quarter in 20 years⁴ and April continued on the negative trend.  The most significant factor regarding bond weakness has been rising interest rates.  Over the past year, the 2-year US Treasury rate has risen from 0.16% to 2.70% while the 10-year US Treasury rate increased from 1.65% to 2.89%.  Rising rates have a negative influence on bond prices.  Also, income generation from bonds were near all time lows in 2020 and 2021, which has left very little income to offset the price declines. 

The source of nearly all market concerns is inflation.  Rising prices, especially unconstrained rising prices, have a ripple effect across the economy and markets.  For the economy, higher prices may create less ability for consumers to spend on things they want because the things they need (like gas and food) are more expensive.  For companies, material costs and employee wages are rising due to high demand and low supply, which can have a negative impact on corporate earnings.  Lastly, the actions to control inflation, usually done by the US Federal Reserve, also have a side effect of stifling growth and potentially causing a recession.  Because inflation has been sustainably higher than anticipated, markets are responding to these events with caution.  Bonds sell off because of the fear of continually rising interest rates and stocks sell off because inflation and subsequent Fed actions to control it could cause a future recession. 

With all of this, we still have a relatively positive outlook from this point forward due to:

• A strong consumer that continues to show high demand for things like travel and restaurants
• Supply chain effects may alleviate to naturally lower the inflation rate as the year progresses
• Company earnings are still expected to grow by nearly 10% in both 2022 and 2023³

If these fundamentals remain intact, the market decline into correction territory could provide an opportunity to add value and increase returns over the long term.  While markets certainly have declined, the greatest damage was done in stocks with severely inflated valuations that have now come back to earth.  High-quality companies that have receded despite no significant change to their earnings profile are now trading more cheaply than they have been over the past few years. 

In short, it is our expectation that the market can stage a second half rally unless inflation continues to accelerate.  We expect inflation readings to continue be elevated in the near term, but the inflation rate will reduce as we progress through the year.  Lastly, we believe the Federal Reserve will raise interest rates, but much of the damage done in the bond market may have been done already. 

Therefore, our recommendation is to remain within the scope of your investment plan and don’t completely avoid risk for safety.  However, this is also not a time to overload on risk as there remains several economic unknowns, volatility remains high, and stocks aren’t cheap.  However, for those investors that have held assets aside “for a rainy day”, investing a portion of that capital for long term higher returns may prove opportunistic at current market levels. 

¹https://www.washingtonpost.com/business/2022/04/29/markets-wall-street-april/

²stockcharts.com

³https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_042922.pdf

⁴https://www.morningstar.com/articles/1087132/13-charts-on-the-markets-first-quarter-performance

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222