July 2022 in Review

Betsy Pierson, CFA, Chief Investment Officer

Welcome to the monthly market update from Midland Wealth Management. I am Betsy Pierson, Chief Investment Officer at Midland. With the volatility we have seen in the markets this year, I wanted to take a few minutes to discuss what happened in July and our thoughts for the next few weeks.

July certainly was a pleasant surprise for the investors following the extremely negative bond and stock markets in June. The stock market, as measured by the S&P 500, returned over 9% during the month, reversing the entire loss during June. The action was similar in the mid- and small-cap markets, as well as represented by the S&P 400 and the Russell 2000 indices. Both returned greater than 10% during July. The strongest index during the month was the Nasdaq, increasing over 12%. In addition, growth stocks performed very well relative to value. While international developed and emerging markets performed better than domestic markets in June, July was just the opposite. The emerging market index on a dollar basis had a negative 0.25% return, while the EAFE, which is the developed markets, increased around 5% during the month. The bond market also reversed course on a total return basis in July with the Bloomberg Intermediate Government Corporate index returning over 1.6%, reversing the entire -1.1% experienced in June.

Why was there such a strong rebound? As we have discussed throughout the last few months, inflation and the Federal Reserve have weighed on markets as the Fed began the monetary tightening policy. Fear of rampant inflation that needed to be corralled drove interest rates higher, the Fed to make aggressive moves, and fear of earnings compression all led to lower returns in the first half of 2022. During July, there was some relief in the markets as intermediate to long-term interest rates declined, corporate earnings came in close to expectations, and the consensus starting to build that the Federal Reserve would raise by 75 basis points in July and potentially need to slow the rate of increase at later meetings. The largest increase in all markets was experienced leading into and after the Fed meeting on July 27^th. During the news conference following the move on July 27th, comments by Chair Powell were interpreted that this would be the last big move and smaller increases would follow, as well as the end target rate would be lower than earlier anticipated.

While this may be true, it is not written in stone and the market may have overreacted in a more positive manner than justified. The rate of inflation may have peaked in June (we won’t know for sure until we get data later this month), but the Fed is still focused on reducing that to the target rate of 2%. The market started to believe that the Fed can achieve that soft landing and avoid a recession. This is to be seen over the next few months and there could be continued volatility in both markets. We may have seen the lows for this cycle in the domestic equity markets and the peak in the 10-year yield, but odds are we remain in a range leading to a potential retest of that low in the market, as well as higher interest rates.

In the international markets, we believe there will be more risk and the odds of recession in Europe have greatly increased with the continued natural gas supply issues caused by the Russian-Ukraine conflict, as well as slowing economic growth. On a long-term basis, it appears domestic equities continue to look expensive relative to international, but in reality they have become more fairly valued with the strong pullback seen in the first half of this year. Because of this, we favor domestic equities relative to international developed equities in our portfolios.

In the event the U.S. does experience a recession in the next year, we do not believe it will be a deep one similar to the Great Financial Crisis but more similar to the recession experienced in the early 1990s. Corporations and consumers have fairly strong balance sheets and should be able to weather an economic pullback.

We continue to be long-term investors in the markets and a long-term diversified investment approach will continue to benefit your portfolio. Markets go up and down and many studies have shown that market timing is difficult, leading to keeping your goals in mind and staying invested according to your risk tolerance and your long-term goals. To get more details on our outlook, take a few minutes to listen to our most recent webcast. It can be accessed at www.midlandsb.com/wealth-management under the ‘Economic & Market Updates’ tab.

If you have any questions or want to speak to someone, please do not hesitate to reach out to us. Thank you and I hope everyone enjoys the rest of the summer.