Market Data for the quarter ended June 30, 2022:

  • S&P 500 Stock Index: 3785, down 16.5%
  • Ten-year Treasury Note Yield: 2.97%, up .64%
  • Gold: $1,804 per ounce, down 7.4%
  • Oil: $106 per barrel, up 6%

US stocks and bonds suffered heavy losses in the second quarter of 2022 as investors grappled with a toxic combination of high inflation and slowing economic growth.  As the quarterly decline in the price of gold demonstrates, the dual threats of inflation and recession left investors with virtually no place to hide.  “Investors” in previously high-flying shares of growth companies and crypto “currencies” were, unsurprisingly, hit the hardest, with the tech-focused Nasdaq stock index down over 22% and Bitcoin falling nearly 57%.  Such “investments” relied upon the largesse of policy makers, particularly the Federal Reserve.  However, during the quarter, the Fed began to move more aggressively to slow the economy and lower inflation via overnight interest rate increases of .50% and .75%, with more of the same promised in the months ahead.

In keeping with the theme of Fed policy, the present situation in which investors find themselves is primarily the result of a monetary policy from the US Federal Reserve that sought to maximize economic growth via the fueling of speculative manias in everything from stocks to real estate, to luxury watches and crypto “currencies.”  The Fed saw this policy as “win-win”:  investors became “rich,” while the job market boomed for workers.  Unfortunately, the Fed did not take seriously the idea that speculative excess could lead to an unstable, overheated economy with the highest inflation in four decades.

To be fair, as Fed Chair Jerome Powell is wont to point out, some of the inflation we are experiencing today is in fact due to Vladimir Putin’s barbaric invasion of Ukraine and the resulting increased price of commodities, particularly those used in the production of energy.  However, the bulk of the inflationary problems we are dealing with are a result of the Fed’s previous monetary policy miscalculations.  Therefore, to a correspondingly large degree, the solution lies in the hands of the Fed.  This is concerning.

Leading up to today, the Fed has already made two significant policy errors:  1) it was overly aggressive in stimulating markets, and 2) it delayed in pulling back its aggressive stimulus once the threat of high inflation was clearly defined LAST FALL.  This being the case, the primary risk to markets moving forward is that the Fed will remain true to form and stop the tightening of monetary policy prematurely due to signs of weakness in economic activity.  We are starting to see such reports come through now and they will almost certainly intensify in the weeks and months ahead.  In response, rather than decisively defeat inflation by continuing to tighten monetary policy, the Fed could prevaricate and send the economy into a sustained period of elevated inflation and sluggish economic growth.

If the Fed chooses to stick to its policy-tightening guns over the remainder of the year, the coming quarter for stocks could see even heavier losses than the one just finished.  While this would likely trigger an outright economic recession with increased unemployment, it would also have the likely benefit of bringing down inflation and setting the economy up for stable long-term growth.  On the other hand, if the Fed goes wobbly and indicates that it will end its monetary policy tightening well before inflation has been driven down to its 2% benchmark, stocks may see a brief reprieve from further selling and enjoy a bounce.  However, after a brief hit of euphoria, stock valuations would likely continue to grind lower as the reality of a semi-permanent state of elevated inflation and low growth sets in.

Although it is difficult to have confidence in a Jerome Powell-led Federal Reserve to do the right thing, we are agnostic as to what policy path the Fed ultimately ends up taking.  Regardless of their actions, we will continue to execute our diversified, high-quality dividend growth investment strategy.  Such a strategy is tailor made for the current market environment of elevated uncertainty, and we are confident that it will continue to deliver market beating returns as investors come to terms with the inevitable unwinding of the speculative bubble created by the Federal Reserve over the previous 36 months.

For the remainder of 2022, we see the US stock market, as represented by the S&P 500 stock index, trading in a range of 3300 to 4200.  It finished the first quarter at 3785.

As always, we appreciate your business and the continued confidence you have placed in us.  Please do not hesitate to contact us with any questions or concerns you may have.