All data and commentary as of June 30th, 2022.
As the S&P 500 hovers at levels near 20% below its recent highs, it is easy to get discouraged and wonder whether these waves of selloffs will ever begin to ease. Whether the focus is on inflation and interest rates, the war in Ukraine, or supply chain issues– headlines continue to paint a grim picture for the remainder of 2022 and beyond. The drawdown we have seen since the start of the year has been a test of mettle for investors, and most experts expect the next couple of quarters to be a rocky road as well while the market grapples with the issues mentioned above.
The Fed has had their work cut out for them this year as they attempt to slow down inflation without sending the US economy into recession. The FOMC meeting in May resulted in a 0.50% rate hike (the largest single hike in 22 years) followed by a 0.75% hike in June (the largest single hike since 1994). An increasingly hawkish Fed signals that they are taking the threat of inflation seriously, and that they are willing to raise rates to tame inflation regardless of how the market handles that news in the short term.
The term “recession” is becoming more and more common, and economic indicators are beginning to point toward increasing odds of a textbook recession in the next 12-18 months (if we are not already in it), especially with a more aggressive Fed. While extended bear markets are discouraging for any investor, indicators suggest that the next recession will likely be much milder than what we saw in 2000 or 2008. The labor market remains strong, and supply chain issues have resulted in continued pent-up demand for goods and services. It is also important to remember that the US economy historically has had “long summers and short winters”, with the average expansion lasting 5 years and average recession lasting only 10 months since 1946. Recessions are a normal part of a healthy cyclical economy, and tend to be short-term in their effect on portfolios.
With that said, all is not lost and there are plenty of ways for disciplined long-term investors to take advantage of the current environment. The most important way an investor can minimize the impact of market drawdowns is to simply avoid making any material changes to their portfolio and stick to their original investing plan. Selling assets to cash out of fear, or taking on additional risk in an attempt to “make up for” recent losses will only damage the risk/return profile of the portfolio over the long term.
As it relates to our wealth management clients’ portfolios, we continue to keep the duration of fixed income positions short to reduce responsiveness to rising interest rates. On the equity side, we continue to maintain a well-diversified mix of securities across the market capitalization and geographic spectrum. We are also taking the opportunity to harvest losses where there is a tax benefit on an account-by-account basis, and monitoring portfolios for rebalancing opportunities to ensure they are not drifting from their established asset mix amid elevated market volatility.
