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Challenges with The Stock Market - July Market Update

July 11, 2022
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Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102

At-A-Glance

7 min read

  • The first six months of 2022 were extremely challenging with the stock market, as measured by the S&P 500 index, having its worst first half performance since 1970.

  • Contrary to what we have seen during times of volatility over the last 30 years, the Federal Reserve Bank raised interest rates aggressively to fight rising and persistent inflation. This led to double digit losses in the bond market as well.

  • Google search for the word “recession” has risen dramatically as people are concerned that we may have a second quarter of negative GDP growth, something typically associated with recessions.

  • We have seen the job market continue to exhibit strength over the last several months and unemployment remains at 3.6%.

  • From a historical standpoint, downturns of more than 20% in the stock market have led to attractive buying opportunities for those who are both patient and opportunistic.

The Investylitics Committee of Horizon Advisor Network met on the afternoon of Monday, July 11th to review the economic and investment landscape, as well as the performance and allocation of our model portfolios. While disappointed with the absolute returns that we have experienced in both the stock and bond markets this year, we are pleased that our portfolios have performed in line with or better than their risk adjusted, index-based benchmarks over the last one, three and five years.

As you will likely see from your June 30th statements, the first half of calendar year ‘22 was extremely challenging. It was marked by multiple bouts of downward volatility in the stock and bond markets, both in the US and globally. This volatility was sparked initially by the Federal Reserve Bank shifting policy to aggressively fight rising and persistent inflation. Subsequent bouts were caused by Russia’s invasion of Ukraine, substantial increases in the price of gasoline and groceries, as well as continuing supply chain constraints, which were recently exacerbated by new rounds of Covid shutdowns in Shanghai China, one of the largest shipping ports in the world.

As you can see in the chart below, this led to the worst period of performance for a typical 60% stock, 40% bond allocation, that we have seen in more than 45 years. In addition to the downturns that we saw in the stock market, which as you all know is not uncommon, the biggest difference this year is that the Fed has been raising interest rates to try to curb inflation which has stubbornly ratcheted higher throughout the year. These interest rate increases have led to double digit drops in the bond market, leaving investors little place to hide.

Over the last few decades, we have grown accustomed to the central bank cutting interest rates to spur economic activity each time we have gone through a bout of volatility or an economic downturn. We saw this play out multiple times over the last twenty years including after the 9/11 attacks, the failure of AIG/Lehman Brothers in September 2008, and most recently during the initial Covid shutdowns in the spring of 2020. These interest rate cuts have also led to gains in bonds, helping offset losses from the stock portion of portfolios.

All of this has led to significant recession concerns. We have seen both consumer sentiment and CEO confidence drop significantly this year. As you can see below, Google searches for the word “recession” have risen dramatically and we will soon find out if we had a second quarter in a row of negative GDP growth, something that is often associated with recessions.

It is interesting to note that we have seen the job market continue to exhibit strength over the last several months and the unemployment rate has remained constant at 3.6%. The number of jobs created continue to exceed expectations, and we also know that there are nearly two jobs available for every one person looking for work. This is a double edge sword, as it is also leading to wage increases that may help individuals but put upward pressure on inflation.

Final Takeaway

The committee will continue to watch the markets and the economy, and we stand ready to adjust our model portfolios as needed for the benefit of you, our trusted friends and clients. We would like to remind you that from a historical standpoint, downturns of more than 20% in the stock market have typically led to attractive buying opportunities and future returns for investors who are both patient and opportunistic.

We also want to point out that this is the seventh time since the beginning of calendar year 2010 that we have seen the stock market drop more than 10%. As George Harrison told us, This Too Shall Pass, although nobody knows exactly when. We are here to help you navigate these difficult and unusual times. Should you have questions about your specific situation, please do not hesitate to reach out to your financial advisor. We are here to help you.

Should you have any questions regarding these notes, please do not hesitate to contact Kevin at (678) 401-6102

 

Members of the Investment Committee

  • Jesse Hurst, Financial Advisor - Chair, Impel Wealth Management

  • Kevin Myers, Financial Advisor - 30A Wealth Management

  • Clint Gautreau, Financial AdvisorHorizon Financial Group

  • Nathan Ollish, Financial Advisor - Impel Wealth Management

  • Joy Schlie, Financial AdvisorFHT Financial Advisors

The views stated in this piece are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.

Past performance does not guarantee future results. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.