June 2022 in Review

Daniel Zeigler, CFP®, CMFC®, Senior Portfolio Manager 

Welcome to the monthly market update from Midland Wealth Management. I am Dan Zeigler, Senior Portfolio Manager at Midland. Today I just wanted to take a few minutes to give you an update on the markets for the first half of 2022.

As the second quarter draws to a close, the headlines today read, “Financial markets suffer their worst first-half performance since 1970.” Stocks have officially entered a ‘bear market’ which is typically defined as being down more than 20% from their highs, and investors have largely priced in a significant economic slowdown and a higher probability of a recession. For the month of June, the S&P 500 index was down about 8% and down close to 20% for the year. When you dive deeper into the past 11 bear markets, on average they have lasted for about 16 months. And historically, investors have been rewarded if they stayed investing during that bear market, as historic returns at the end of the bear market have averaged close to 43% in 12 months.

Persistent inflation continues to force global central banks to be more aggressive, which could pose more headwinds for economic growth. The Federal Reserve increased their Fed Funds rate by 75 basis points in June, which was the highest rate increase since 1994. The Fed Funds rate now stands at 1.50 to 1.75% and the Fed is expected to increase rates by either 50 basis points or 75 basis points again at the end of July. The Federal Reserve cannot directly control commodity prices like gasoline; however, they are trying to slow down growth and lower demand, which may help lower inflation. Recently, many of the commodities have actually rolled over from their all-time highs, which could lead to less inflation pressures. For example, natural gas is down over 30% and lumber is down over 57% from their most recent highs.

Investors will be closely monitoring many economic indicators in July. Corporate earnings season is ready to begin, and all eyes will be on the companies’ profits and outlooks. Currently, corporate earnings are expected to grow by 8% which is still a very solid earnings growth rate. Investors will also be looking for signs that inflation is cooling, and the next important Consumer Price Index reading will be on July 13th. The stock market may have a hard time gaining momentum until it is more certain that the rate of inflation is decelerating.

In the long run, stock valuations and fundamentals matter. We are in the midst of a repricing of global stock market valuations to better reflect current fundamentals. This should be positive for creating opportunities for long-term equity investors. Also, current stock valuations are now trading below their 25-year average and stocks have gotten significantly oversold which could setup for a rally in the second half of this year.

We continue to be long-term investors in this market and investors should continue to stick to an appropriate diversified long-term investment strategy. Please be on the lookout for our end of quarter newsletter for additional insights. 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 has a great Fourth of July weekend.