July Market Insight
Rarely have economic circumstances negatively or positively impacted both the equity and fixed income markets in the same way, at the same time, for any pronounced length of time. The first two quarters of 2022, with both bonds and stocks generating negative returns, is highly unusual. What has created this highly unique environment and why did investment conditions change so abruptly? Though the Federal Reserve had clearly communicated their likely policy change back in late 2021, the magnitude of the Fed’s more aggressive perceived stance is almost entirely due to the exacerbated inflation conditions created by the Russian invasion. This military action had not been anticipated and was not an original factor for the Fed to consider. As energy and agricultural commodity prices clearly increased so did the Fed’s reaction. In the short-run, investors who were singularly concerned with short-term returns de-risked and sold both bonds and stocks. As cited last month, neither economic nor financial market activity is linear. Investors, individual and institutional, with both short and long-term time horizons constantly adjust to risks which are known or perceived. As we start the second half of the year, long-term rates have stabilized, commodity prices have reversed course and are now in a downward trend while corporate earnings are defying the odds and growing. Time and time again, patience is rewarded for those who maintain a long-term plan and hold a diversified portfolio.