Market & Economic Commentary: Q2 2022

A Challenging Quarter by All Measures

The second quarter of 2022 was challenging for investors as markets responded negatively to shifting interest rates, supply chain snarls, inflationary pressures, and geopolitical challenges. The sell-off in equities and bonds was broad and deep, at one point pushing the S&P 500 and NASDAQ down for seven straight weekly losses, the longest such stretch since the dot-com bubble burst. In June, the S&P 500 punctuated a three-week losing streak by falling firmly into bear market territory (down over 20% from its all-time high on January 3rd), only to rebound the following week by +6.5%.

Despite the strong rally in late June, equity markets experienced their worst first-half performance in decades. Of the 11 industrial sectors that comprise the S&P 500, just one posted a gain. Energy stocks rose 29.2% on soaring crude oil and gasoline prices. Meanwhile, the tech-heavy Nasdaq plunged more than 30% since its peak last November, led downward by mega-caps like Netflix (-71%), Meta (-52%), Amazon (-38%), and Apple (-25%).[1] Value and low volatility strategies outperformed, signaling the market’s continuing emphasis on defense. Growth and High Beta investments have been the year’s worst performers.[2]

Although usually seen as a hedge against equity volatility, fixed income also declined for the quarter across markets. The Bloomberg U.S. Aggregate bond index, which holds predominantly U.S. Treasuries, highly rated corporate bonds, and mortgage-backed securities, posted -4.69% for the quarter and -10.35% for the year. International bonds fared worse, with the Bloomberg Barclays Global Aggregate Index, comprised of bonds from both developed and emerging markets, losing -8.26% for the quarter and -13.91% year to date.[3]

The Macroeconomic Environment Is Dominating Everything Else

Inflation reached its highest level in over four decades. In May, the consumer price index (CPI) climbed 8.6% from a year earlier, the fastest pace since December 1981, while the Federal Reserve’s preferred gauge, the personal consumption expenditures price index (PCE), rose 6.3% from a year earlier. Inflationary pressures globally were ignited by Pandemic-related supply chain disruptions but then were fueled further by surging energy prices and the war in Ukraine.  However, oil and gas prices moderated slightly by quarter-end as a slowdown in consumer and industrial spending and the acceleration of recession fears both served to cool demand.

Worried that soaring prices could become entrenched, elevating the risks to economic growth, the Federal Reserve determined a “more restrictive stance on policy” was warranted and responded with a 75-basis point (0.75%) rate hike on June 15th, the most significant such move in almost 30 years. Higher interest rates concern markets because they usually lead to slower growth. As such, markets have been highly sensitive to any comments from the Federal Reserve regarding potential future rate increases.

Are We In/Headed for A Recession?

Just two years removed from the last U.S. recession, negative stock returns and aggressive U.S. Federal Reserve interest rate hikes have many market participants nervously watching for signs of a recession. While increasing interest rates often precipitate a recession, the current environment boasts some unusual strengths that do not typically herald an economic contraction, such as a tight labor market and cash savings that accumulated over the Pandemic. Additionally, bank balance sheets are robust, and many individuals have built considerable home equity in the past few years. Indeed, a recession could be imminent – or we could be in one presently – but with a cushion of unfilled jobs and savings, there could be buffers to prevent a deep economic contraction. 

Importantly, recessions are always identified with a lag, so we won’t know if we have been in one until the markets anticipate a recovery. For most investors, it is worth noting that markets are forward-looking systems that tend to fall in advance of potential risk and uncertainty and start climbing before the economic recovery. In fact, market returns have frequently been positive during periods of economic recession. Over the past century, returns on U.S. equities have been positive two years after a recession began for 12 of the 16 recorded recessions.[4] Using history as a guide, long-term investors can take some solace in knowing that the optimal strategy has been to endure economic downturns, ignore talk of recessions, and stay focused on maintaining broad-based diversification across geographies, investment vehicles, asset classes, and risk factors.

Final Thoughts

The stock markets often climb a wall of worry, and investors must endure periods of decline. Understandably, the perceived loss of control is among the most unsettling aspects of market downturns, and it is exacerbated by the constant drumbeat of dire news coverage of the financial markets and global and U.S. economies. However, the seeds of the next bull market are sown in the depths of the bear, and the investor who stays disciplined and focused on their long-term goals is best positioned to enjoy the rewards associated with growth over time. As always, we are constantly monitoring economic developments and markets and will continue to keep you apprised.

 Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not
reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.

S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.

Dow Jones Industrial Average (DJIA) Is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The Nasdaq Composite Index (NASDAQ) measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market and includes over 2,500 companies.
MSCI World Ex USA GR USD Index captures large and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI).  The index consists of the 25 emerging market country indexes.
Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.

Bloomberg Barclays Global Aggregate (USD Hedged) Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate, and securitized fixed-rate bonds from both developed and emerging market issuers. Index is USD hedged.

© Morningstar 2021. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

The Kaminsky-Silverman Group utilizes Symmetry Partners, LLC (SP), which is a third-party service provider that supplies market data and assists in creation and monitoring of factor-based investment models.  SP is also an investment advisory firm registered with the Securities and Exchange Commission. All data is from sources believed to be reliable but cannot be guaranteed or warranted. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment related content made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.

Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio.  Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.  Past performance does not guarantee future results.

This material is confidential and is provided for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your investment. Any opinions, expectations and projections within this document are solely those of the Portfolio Manager(s) identified, and do not necessarily represent the viewpoint of Shufro, Rose & Co., LLC or other Portfolio Managers at the firm. This report was prepared by Shufro, Rose & Co., LLC and is presumed to be correct. Shufro, Rose & Co., LLC is an investment adviser registered with the Securities and Exchange Commission. ADV Part 2A is available upon request or at https://adviserinfo.sec.gov/. Please contact Shufro, Rose & Co., LLC at (212) 754‐5100 with any questions.

[1] Morningstar Direct, as of July 1st, 2022

[2] Morningstar Direct, as of July 1st, 2022

[3] Morningstar Direct, as of July 1st, 2022

[4] Dimensional Fund Advisors LP

Check Out Our Other Investment and Market Commentaries