Tudor June 2022 Commentary
Research-Based Investing and Guidance Since 1992
High-Level Financial Care for Clients in Over 30 States

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Markets Already
Reflect the Risks

Markets have had a tough month in June, declining as of this writing by about 8.5%(1). This adds to a cumulative decline since the beginning of 2022 and makes the first half of this year one of the most challenging since 1970.(3) Enough so to nudge the S&P 500 into a bear market during the month.

The investment world has no bragging rights on performance this year - the fifteen asset classes we track are all showing declines...including gold, bonds, all variety of stocks and real estate. There have been no good investment alternatives to reallocate to except cash which is sometimes an ideal parking spot when markets are overvalued or throwing tantrums as they are now. But keep in mind that cash is losing 7% to inflation. And one has to be careful with cash allocations - they can be a crutch from panic selling, and studies consistently show that panic selling is a sure detriment to long-term outcomes.(5)

Our view is that there are several, mostly legitimate, reasons for declines in 2022:

  • After a two-year, smooth-sailing, correction-free market, experienced investors would expect a pullback this year (even as this pullback evolved to a bear market for several reasons we note below). Corrections occur about every year, and it was time
  • As we've communicated since January, mid-term election years are nearly always frothy in the first half. Market gains in these years most often come in the back half
  • The Federal Reserve is on an interest rate binge to bring down inflation. Interest rates are a weight on all asset classes, including stocks, bonds, your home and every other asset on the planet
  • Inflation. Inflation is not exclusive to the U.S. - it is a worldwide phenomenon as 45 nations around the world, including the U.S., raise interest rates to combat it(4)
  • The risk of recession - monotonously trumpeted in the media nearly every day. Markets don't care much about politics, but they do care about economic slowdowns
  • Massive speculation in 2021. Day trading, SPAC's, meme stocks, money flowing to questionable asset classes, speculation in real estate. Valuations were excessive in 2021 and we were not shy about trumpeting this phenomenon. As the calendar flipped to 2022, year-to-date 50-80% declines in speculative assets are everywhere
  • A winding down of government stimulus, which equated to about 30% of the economy ($6 trillion in 2021 alone) in the prior two years(6)

Our commentary in recent years has shown a flowing pattern. It began with our observation of extreme undervaluation in early 2020 due to the COVID correction. At the time, markets were on sale and stocks significantly undervalued. The Dow was at 18,000 (compared to 31,000 today). This period was followed by massive speculation, downright silliness and overvaluation in 2021. Now as we migrate through 2022, we see broad markets have come down to reasonable levels and are fairly valued. Not undervalued, but fairly valued.

All is not lost. 2022's market decline is far from the worst first half performance in history.(7) Additionally, large declining quarters (such as the June quarter just finished) have historically been followed by large recoveries as we note below. Patient investors have the most favorable outcomes, and we suspect that will be the case as the year progresses.
17.1% & 29.6%
 
Since 1950, the Average Returns of the Market Two Quarters and Four Quarters After Declines Similar to This Past Quarter's Performance
 
(Source: LPL Research, Factset)
Who Will Buy Your House?
While it's always nice to see our homes appreciate in value, not all is rosy when real estate prices become speculative. Harvard University's State of the Nation's Housing Report suggests that the average home in 2022 now costs $374,900. This represents a 21% increase from the prior year.

Higher home prices are now coupled together with higher interest rates. According to bankrate.com, thirty-year mortgage rates have nearly doubled from 3.11% in 2020 to 5.98% today. With these increases, it is important to remember that wages/income have not kept pace with real estate price inflation and a doubling of interest rates. The Federal Reserve says that every one percentage point increase on the 30-year mortgage decreases property sales by 10%.

Home price increases are universal throughout the U.S., so selling a home in one region means that you are buying a price-appreciated one elsewhere. In most cases, this suggests that the the advantage of your home appreciation disappears.

The Harvard study determined that home price and interest rate increases have locked 4 million potential buyers out of the market as annual home ownership costs increased $8,400 over the last year. This means that they are fewer buyers that can afford to buy your home.

It is clear that the recent pace of price gains is unsustainable. Buyers will dry up and banks will not lend to those without income to support higher-priced homes. Our view is that real estate inflation will slow and in many cases reverse in the next few years.
When It's Too Good to be True

The SEC slammed Schwab with $187 million in fines for misleading clients about its robo-investment programs that automatically invest client accounts.

The SEC said that Schwab misled investors that their robo services were free, when in reality the service forced investor funds into cash-oriented investments that earned little returns while Schwab lent out the funds through their affiliated bank. Cash levels of 6 - 29% were common in investor accounts. The company claimed that these levels were determined by sophisticated algorithm models, but in reality, the SEC suggested that the allocations were there to allow Schwab to lend out funds for a profit.

Source: RIAIntel, June 2022

46,000
The Number of People That Have Lost Money in Crypto Scams Since January 2021

(Source: Federal Trade Commission)
55%+

In 2022, Typical Declines of
Crypto Currencies from Their Highs

The June 12th edition of the Wall Street Journal reports that crypto losses are
estimated at $1.5 trillion in 2022
"It is Better to Have a Hen Tomorrow
Than an Egg Today"
Thomas Fuller
Dow Industrial Index

March 23, 2020 - 18,214 (2020 low)

June 30, 2022 - 30,789(1)

69% Gain
Enjoy the week...
Grant S. Donaldson, MS, CPA
(1) yahoofinance.com, S&P500 historical data, Barrons, Morningstar.com, Vanguard benchmark returns
(2) Information available upon request
(3) What's Next for the Stock Market?, marketwatch.com, June 29, 2022
(4) Interest Rates Rise Around the World, as War and High Inflation Grind On, New York Times, June 16 2022
(5) https://www.ifa.com/articles/dalbar_2016_qaib_investors_still_their_worst_enemy
(7) https://www.wsj.com/articles/markets-head-toward-worst-start-to-a-year-in-decades-11656551051
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