June 2022
Market Update

It is that time of year again … when we in Arizona moan about the repetitious drone of 100+ degree days.  Which also signals that the kiddos are out of school, summer vacations are in full swing – oh, and it’s time for our annual Client Appreciation event in Utah!  We welcome you to join us in Salt Lake City on July 9th to watch the Real Salt Lake take on the Colorado Rapids. CLICK HERE to reserve your spot, and watch your email for additional details.

With the fun stuff out of the way, let’s turn to the serious business of what on earth is happening in the world and the stock markets.  May was the poster child for the volatility we have been talking about all year with the NASDAQ once again taking it on the chin.  At one point the S&P was down 18.2% for the year, flirting with bear-market territory (defined as a decline of 20% or more) while the tech-heavy NASDAQ was firmly in bear market space, racking up losses of 28.4%.  Yet going into the closing days of the month, both rallied with the S&P able to finish flat, at least for the month of May, and the NASDAQ off a little more than 1%.  Phew! 

The catalyst for this volatility is still being driven by the moves of the Federal Reserve.   Anxiety was high going into their latest meeting as markets were fearful of an increase of more than .5% in the short-term lending rate.  Remember, the short-term lending rate is all the Federal Reserve can really directly set and this affects what you and I get on money market accounts or CD’s.  Indirectly, the movement of this interest rate can impact longer term treasury rates which are then what influence mortgage rates.   In raising rates, the Federal Reserve is hoping to slow down the economy and help chill the inflation burn we are all feeling at the pump and the grocery store.  Just the mere threat of the short term rates going up caused the mortgage rates to jump dramatically, from 3.25% a year ago to currently a national average of 5.4%, which we haven’t seen since 2000. This will slow demand in the housing market, especially once inventories catch up.

The devil will be in the details and here it is nuanced.  The Federal Reserve has two tools they can use:  raising the short term interest rates, and decreasing the amount of assets – bonds – on their balance sheet.  Can the Federal Reserve raise rates, sell bonds, and engineer a soft landing in slowing the pace of inflation while keeping the economy growing just enough to avoid throwing us into a recession?  We refer you once again to the graphic (CLICK HERE) we used in our zoominar last month as we looked at what the S&P behavior was during the last time the Federal Reserve began a program of “quantitative tightening”.  

After moving the short-term lending to zero during the peak of the financial crisis, it took The Federal Reserve three years to begin slowly increasing interest rates.  From December of 2015 until December of 2018, they methodically raised rates in .25% increments until that short term lending rate rested at 2.5%.  Then they began to decrease the size of their balance sheet by selling bonds in the range of $50M per month.  You will see in the corresponding period that the S&P suffered from some bouts of volatility as this process commenced – and then righted and actually moved higher until we were hit by the pandemic.

The Federal Reserve has currently telegraphed their intent to raise rates, now in .5% increments, to 2.25% by the end of this year.  They are going to take one year to accomplish what it took them three years to do following the Great Recession of 2008.  And the size of their balance sheet sales will almost double from where they were from 2018-2020.  Faster and larger increases and larger bond sales are causing market volatility in both stocks and bonds.  Whether the markets can weather the volatility to rally remains to be seen, however it should be noted that both corporate and individual balance sheets are in much better condition that they were during that last recession, so they could prove resilient.

In your portfolios here, we were able to move back into some segments of the bond market, so cash was put back to work.  The impending moves by the Federal Reserve may make this a short-term trade, but as always we rely on the models to keep us on track.  In stocks, we have re-entered part of our risk-off trade from April as parts of the market had certainly gotten oversold.  As always, if the volatility means you don’t sleep at night, let’s discuss steps to help that keep your plan on track.

Enjoy your summer vacations and we hope to see you in Utah for some great soccer!

If you have questions, please contact us.

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GRAPHIC OF THE MONTH

To download the June 2022 Newsletter: CLICK HERE