If the movement downward in the bond and equity markets throughout the first quarter went by without you noticing, it is unlikely that you missed the further movements down in the 2nd quarter. The S&P 500 experienced a nearly 17% move downward in the second quarter to finish the first half of the year down over 20%, and entering a bear market for the year to date. Other than the fact that it is new, the market moving downward in and of itself is not newsworthy. This is a very normal occurrence that happens from time to time and can be healthy for the markets. What is new and newsworthy with this movement downward is the direction of the bond market. During many of the movements downward in the stock market that have occurred over the history of the public markets, the bond market has been positive and provided stability and buoyancy to diversified portfolios. However, the US AGG closed out the second quarter down almost 5% to finish the first half of the year down over 10%. So, the place that many investors look for safety and stability in down markets was also moving downward.
As I mentioned, the markets, both stock and bond, were markedly down in the past quarter to finish out the first half of the year in negative territory. This movement downward in the markets has had a correctional impact on market valuations. Often you will hear the media talk about the market (or a company) being either overpriced, or cheap. Many times, what they are referring to is the price to earnings ratio, or P/E ratio. This is a measure of share price vs. forward earnings expectations or current earnings. With this movement downward in market pricing, and with earnings currently remaining stable, the price as compared to the earnings has brought the market in to what would be considered a more fairly valued level. This should be a positive moving forward, as when sentiment returns to a more positive level, valuations should still be in a position to allow for multiple expansion at a healthy level.

As I stated, the bond market has also seen a double digit move to the downside this year. This movement has been more greatly felt in bond funds with a longer duration. Duration is measure of sensitivity to interest rate moves and is related to the length of time until a bond matures. The longer the duration on a bond fund, the greater the sensitivity to interest rate moves. From the early ‘80s (until the financial crisis), interest rates were on a generally downward sloping curve. Because bond pricing and interest rates have an inverse relationship, bond total return was strong. As we have spent more than a decade at near zero rates, the most likely movement in rates is to the upside which then puts pressure on the price of bonds moving forward. This is what we have seen this year. As the Fed has increased their rates, and the rates on almost all bond tools has risen, the pressure on bond pricing has been to the downside. Because yields are still so low, the total return on most bonds has been negative.

Emerging markets have faired slightly better than developed markets in the 2nd quarter, though still are negative for the year. With the war in Russia disrupting commodity markets, the emerging market economies have generally benefited. Their central banks had been working to move against inflation earlier than banks in developed economies. And those with oil have been able to generate additional income due to the rise in prices. Those not rich in oil have taken advantage of locking in pricing in local currencies, which has provided stability to their energy markets.

Broadly, moving forward there are few changes to existing investments that would be recommended in a large group forum at this time. Maintaining current positioning and leaning on the strength of your financial plan should allow you to remain invested and will provide the stability needed for this period of volatility.
As I said, remaining true to your plan should be your best route forward. If you haven’t yet developed a comprehensive financial plan, then that should be your first step. Through a personalized financial plan, we can help you with proper wealth management, tax planning, estate planning, insurance and Medicare planning, succession planning (for both your family legacy and your business), and corporate benefits.

For those of you still working, this environment continues to support workers as wage growth continues to increase at a rate greater than we have seen in sometime. That is important because inflation has remained high and will continue to be high. Even the beginning of a downward trend of inflation will not mute prices. It simply means that the rate at which they increase will slow. New highs in most goods are here to stay and the war in Ukraine will further cause volatility in the food, energy, and other commodity markets. China’s continued use of lockdowns instead of medicine to fight their COVID outbreaks will continue to stifle improvements in the supply chain, which will continue to cause issue for retailers of all kinds.

It would be very easy to take all of this and lose hope for the future. But it is at times like this that the innovation and creativity of the American economy and industry tend to shine. Our country, world, and economy have been through so much but to feel like we can’t get through this is shortsighted. Remember; when in doubt, shut off the TV, throw away the newspaper, unplug the computer, put down your smart phone, and meet with your advisor.

Certified Financial Fiduciary®
Financial Advisor
Vice President and CIO
If you’re wondering how these market trends might affect your specific financial plan—or how to take advantage of them—give us a call. We’ll talk about where you’re at, and how to get where you want to be.

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