The Good, The Bad & The Ugly ~ Q2 2022 in Review and Our Investment Philosophy

With the markets entering Bear Market territory in June due to higher inflation, higher interest rates and a slowing economy, concerns about the likelihood of a recession have become a common topic when discussing the country’s financial outlook.

As a result, while there was some “good” coming out of the second quarter, the quarter will be remembered more for the “bad” and “ugly.” We break down the current market conditions below, followed by our longer-term perspective on investing.
 
The Good

  • Unemployment remained at 3.6% in May; the same level since March.

  • Housing starts and existing home sales slowed a bit in May, while new home sales showed a 10.7% increase in June.

  • Crude oil and fuel prices eased a bit during June but remain elevated.

  • Payrolls for the month of June came in well above expectations at 372,000, but below May’s 384,000. Unemployment remained at 3.6%.

  • Manufacturing jobs saw an increase of 29,000 versus a gain of 18,000 in May. Significant gains were also seen in Health Care, Leisure & Hospitality, Warehousing & Storage, and Professional & Business Services.

  • The best performing sectors in the quarter were Consumer Staples (- 4.62%), Utilities (-5.09%), Energy (-5.17%).

The Bad

  • The May Consumer Price Index (CPI) report, which is used as an indicator of inflation to the consumer, came in stronger than expected, rising 8.6% year over year and up 1.0% over April, with prices rising broadly across all sectors, with the largest increase in Energy.

  • The Federal Reserve raised it fed funds rate by 75bps, seemingly in response to continued elevated inflation, the war in Ukraine, and ongoing supply chain issues complicated by lockdowns in China.

  • Short, sharp rallies within an underlying downward trend are typical of bear markets, so investors should be prepared for more volatility.

The Ugly

  • The second quarter delivered the biggest quarterly decline since the height of pandemic fears, with the S&P 500 having the worst quarter since the 1970s.

  • Quarterly performance:

    • S&P 500 (large cap): -16.10%

    • NASDAQ (technology): -22.28%

    • Russell 2000 (small cap): -17.19%

    • MSCI EAFE (international): -14.29%

  • The worst performing sectors in the quarter were Communication Services (-20.71%), Consumer Discretionary (-26.16%), and Technology (-20.24%).

Our Investment Philosophy Remains Focused on Diversification & Long-Term Investing  

The economy spends the majority of the time in expansion mode. For long-term investors, it is ultimately more important to be well-positioned for expansions than to try to tactically trade around recession.

In the current cycle of volatility and weakness, we stay true to our fundamental principles of investing:

  • We emphasize the importance of diversification, across and within asset classes

  • We believe in the power of periodic rebalancing, which comes in the form of trimming investments that have grown beyond your target allocation and buying more of investments that have become underrepresented.

  • We focus on quality-oriented factors when buying equities instead of sectors or traditional style indexes. We believe stocks of companies reflecting certain factors will perform better in relative terms. These include strong free cash flow, healthy balance sheets, positive earnings revisions, and low volatility.

As always, we are here for you and are committed to making sure you are confident in your plan. Please call your wealth advisor to ask questions, discuss any concerns, or to schedule a portfolio review.

Rebecca McClure