Equity markets have rallied since we last shared commentary with you on June 20th with the S&P 500 increasing 9.2% in the month of July. Investors are asking the question of whether this is a “bear market rally” that will return to its downward trend in the near future, or is it part of a sustained recovery that will continue through the end of the year. Evaluating current economic fundamentals, our Investment Committee sees mixed data.
From our perspective, there is still a high degree of uncertainty which will continue to drive market volatility through the end of 2022. U.S. GDP contracted by 0.9% in the second quarter, its second consecutive quarterly contraction in 2022. As economists debate whether we have entered a recession, we are paying close attention to several key factors:
- Inflation remains elevated. There are signs that it is beginning to peak, particularly within supply chains and energy prices which should provide a reprieve to both consumer wallets and businesses coping with elevated transportation costs.
- The Federal Reserve is projected to raise interest rates by another 1% – 1.25% before the end of 2022, bringing interest rates to 3.5%. Easing inflationary pressure may pave the way for less aggressive policy, which would be welcomed by markets.
- The labor market remains healthy, with the July report showing over 500,000 jobs added during the month as unemployment ticked down to 3.5%. As the demand for labor remains elevated, so will wage pressure which should remain supportive of demand for goods and services.
- The geopolitical environment remains highly uncertain as Russia’s invasion of Ukraine continues and recent headlines focused on a U.S. diplomatic visit to Taiwan.
- Equity market valuations have retracted toward their 25-year averages. While this does not mean equities are cheap, our long-term return outlook has improved.
As of this writing, the S&P 500 continues to recover from its lows earlier this year of (-20%). We expect volatility to continue through the end of 2022 and into 2023 particularly as we approach mid-term elections in the fourth quarter. We have used the recent rally as an opportunity to review cash positions providing a margin of safety for upcoming expenditures, and we will continue to navigate the market looking for opportunities to deploy cash at attractive prices. Whether this is a bear-market rally or part of a sustained market recovery, we remain steadfast in our long-term objectives.
Since the 1920s, annual market returns have been positive 74% of the time. While we cannot know what direction the markets will head over the coming months, history suggests that the risk to investors is when we make decisions based on near-term market volatility. Our Investment Committee will continue to manage our portfolios in accordance with our clients’ long-term financial goals as we have found that provides the highest probability of achieving their objectives.
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