Second Quarter 2022 Market Commentary

The first half of the year was brutal. Investors have been scrambling for cover with the highest inflation in four decades and the Federal Reserve’s belated but aggressive reversal of uber-generous monetary policy accommodation to combat it. The S&P 500 Index dropped 20.6 percent, its worst first-half performance since 1970. Benchmark 10-year Treasury yields more than doubled, from 1.5% at the start of the year to an 11-year high at 3.5 percent, before rallying back to 3.0 percent to close the quarter. 

After declining 4.60 percent for the year's first quarter, the S&P 500 Index delivered a second-quarter return of -16.10%. The last time the index fell in back-to-back quarters was in 2009. Complacent investors haven’t seen this level of volatility in years—and some cases, decades. For example, during April, the S&P 500 recorded its worst month since March 2020. June’s return was equally painful. Not to be outdone, the April return (-13.24%) of the NASDAQ was the worst in 14 years. Furthermore, into mid-May, the S&P 500 and NASDAQ finished lower for seven consecutive weeks for the first time in over 20 years and over 10 years, respectively. 

During periods of high volatility, watching daily market movements can cause extreme fear. In the past, I have referenced the days in which the market advances or declines by more than one percent. Year-to-date, there have been 63 such days—surpassing the total experienced in 2021—and on pace with dramatic years such as 2008, 2009, and 2020.

Volatility has pushed investor sentiment to an extremely low level. Historically, this measure has proved to be a contrarian indicator. Warren Buffett famously stated, “Be fearful when others are greedy and greedy when others are fearful.”

In a more aggressive move to fight inflation than it had spelled out weeks before, the Federal Reserve (Fed) raised the federal funds rate by 0.75% in mid-June. The largest single bump to interest rates since 1994 and the third hike this year. 

Expectations of higher interest rates pushed the Bloomberg U.S. Aggregate Index deeper into negative territory. After the worst quarterly return (1Q22: -5.93) in 40 years, the index followed with a -4.69 percent return during the second quarter. The return in April (-3.79%) was the worst month since February 1980 and marked the fifth consecutive month of declines—the longest streak since June 1994. On a positive note, the yield on the index closed the quarter at 3.72 percent, which is near the highest reading over the past decade. Perhaps the ‘income’ is coming back to fixed income. A strong correlation exists between starting yield and forward returns. Current yields are encouraging.

Stocks and bonds declining in unison make a challenging investment environment that is rare. According to BlackRock, it is historically rare for U.S. stocks and bonds to be negative simultaneously. On the minds of market pundits are if this relationship resolves itself through lower yields or higher stock prices. 

Weak markets are challenging for any investor, but doubly so for those who take too big a bite from exciting trends at the cost of more pragmatic approaches. Times like these are why we are proud to focus on topics like risk, time horizon, suitability, portfolio diversity, and financial strategies developed to support your long-term goals.

Please let us know if you have any questions. Thank you for your trust in us.

Bloomberg U.S. Aggregate is an unmanaged market value weighted performance benchmark for investment-grade fixed rate debt issues, including government, corporate, asset backed, mortgage-backed securities with a maturity of at least 1 year.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The NASDAQ Composite is an index measuring all NASDAQ domestic and international based common equities listed on The NASDAQ Stock Market. The NASDAQ Composite is calculated under a market capitalization weighted

methodology index, which means that the weight of each stock in the index is proportional to the total market value of its shares. Securities in the index include the following: American Depository Receipts (ADRs), common stocks, Real Estate Investment Trusts (REITs), and tracking stocks.

Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Craig Popp, CFA and not necessarily those of RJFS or Raymond James. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise