The sky is falling! Not so fast, Chicken Little…
Markets had their worst first half of the year since 1970, leaving investors’ nerves on edge. Higher (and not-so-temporary) inflation and fears of recession weighed heavy on the markets, as the Fed continued to tighten monetary policy. The stock market is down, yes. However, corporate America remains solid, despite significant headwinds over the past two years. Analysts expect earnings to rise by 10% this year and just over 9% in 2023, and America’s CEOs are optimistic, with more than half of the CEOs reporting plans to increase sales, capital spending and employment (collectively), according to Business Table’s Q2 CEO Economic Outlook Index. Market performance in the coming quarter will depend, to a significant extent, on whether the Fed can manage a “soft landing,” with continued rate hikes and balance sheet reductions that neither intensify inflation nor stifle economic growth.
If you watch the news, you’ll hear a wide range of opinions on the economic outlook, running the gamut from a frenzied cry of “the sky is falling” to a relieved sigh at seeing “the light at the end of the tunnel.” The truth likely lies somewhere in between, and the one thing that is consistent is uncertainty. No one, not even the Fed, really knew how to deal with a post-pandemic world (and certainly not one with the ensuing geopolitical stresses).
So, how “bad off” is the market on a relative basis? The DJIA ended Q2 at 30,775 -- compared to the Dow’s pre-pandemic level of 29,398 at the close on February 14, 2020. We’ve been through a lot during that timeframe, individually, economically, as a nation, as a global community … and we’re holding tough. Yes, the risk of recession is real. As the Fed continues its transition to tighter monetary policy, the nation keeps its collective fingers crossed … too much could result in a recession but too little will intensify inflation. But one thing that history has taught us is that a recovery will come. It’s just a matter of when.
In times like these, while it can be stressful, it’s even more important to stay the course. Could we see further market declines? Yes. Although a recovery will come, no one knows when. We maintain our belief that remaining focused on the long term will be rewarded by the markets in due time.
Be sure you put your feet in the right place, then stand firm. – Abraham Lincoln
Recent Economic Data:
Gross Domestic Product (GDP). The GDPNow model estimate for real GDP growth in the second quarter of 2022 is -2.1%, (seasonally adjusted annual rate; estimate released July 1, 2022), a further contraction from -1.6% in Q1 2022.
Unemployment. Unemployment remains low, with a May unemployment rate of 3.6% and the number of unemployed persons at 6.0 million, comparable to pre-pandemic unemployment (February 2020: 3.5% and 5.7 million).
Consumer Confidence. The Conference Board Consumer Confidence Index, an indication of consumer attitudes and buying intentions, decreased in Q2, and now stands at 98.7%, down from 107.2 in March (1985=100). The index is at its lowest level since February 2021, with consumers more pessimistic about current and short-term business conditions, labor market and personal financial prospects.
Consumer Price Index (CPI). The CPI for All Urban Consumers (CPI-U), a measure of inflation which shows “cost of living” fluctuations, increased 1.0% in May on a seasonally adjusted basis, and for 12 months ending May the CPI-U increased 8.6% before seasonal adjustments.
Earnings. For Q2 2022, the estimated earnings growth rate for the S&P is 4.1%, down slightly from Q1’s 4.4%.
Housing. Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,549,000, down from 1,793,000 in March and slightly lower than the May 2021 rate of 1,605,000. Builders’ confidence fell for the sixth consecutive month in June to 67, a two-year low.
June 30, 2022
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The views expressed represent the opinion of Asset Management Financial Solutions, Inc. (“AMFS”) and are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and AMFS’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.