Market Update June 16, 2022
Betsy Pierson, CFA
Chris LaPorta, CTFA, AFIM
The Federal Reserve raised short-term interest rates by 75 basis points on Wednesday, June 15th, as expected by the markets following the most recent Consumer Price Inflation report on Friday, June 10th. The inflation rate for May and year-over-year came in higher than expected. With the higher inflation rates, the Federal Reserve is faced with putting an end to the ‘easy money’ policy which has been in place since the Global Financial Crisis of 2008–2009. Albeit painful, this will be positive over the longer-term. The S&P 500 finally moved into bear market territory on Monday, June 13th, after flirting with it earlier this year. The added volatility paired with negative total returns in most major asset classes have been a cause for many investors to be nervous. There continues to be several risks to the market with the largest being persistently high inflation and the fear the Federal Reserve will be too aggressive and lead the economy into a recession.
From an equity market perspective, we do believe we are closer to the bottom than the top, but no one can accurately call a bottom. Valuations on a forward Price to Earnings (P/E) ratio basis appear much more favorable and closer to long-term averages. The biggest risk to this is the ‘E’ in the P/E going forward. Several large retailers announced that excess inventories exist and will need to lower prices which will negatively impact earnings. Inflationary pressures continue, especially in energy and input costs. Will companies be able to pass along all the pricing, continue to have demand, and maintain the expected earnings growth by market analysts? We are on the cusp of second quarter earnings, so this may add more volatility to the market, as well as continued monitoring of inflationary pressures.
It is not easy to sit and watch your portfolio decrease, especially after several years of euphoric-like returns. The natural reaction is to want to sell and buy back later or what we refer to as ‘market timing’. This will almost always lead to missed opportunities in the market and chasing performance. Finding ‘the bottom’ in a bear market is a process which is not done over a couple days or even a couple months. We have seen these bear market periods many times in 1987, 1994, 1998, 2000, 2009, 2018, 2020 (pandemic-induced), and today. Despite these pullbacks, when looking at it through a long-term lens, markets have always risen over time. Time in the market is more advantageous than timing the market.
The psychology and emotions in investing can take a toll. Please feel secure in knowing that we are here to help. At Midland, it is our fiduciary duty to ensure your portfolio aligns with your short-, mid- and long-term goals. Communication is key. As your goals and needs change, we can adjust your portfolios appropriately. In doing so, this can also assist in maneuvering through drawdowns and bear markets, and even take advantage of long-term opportunities.
We are committed to providing you the services and support you need. We want you to stay informed and reassure you that we are alert in monitoring the markets and your accounts. Please do not hesitate to reach out with any questions or concerns.