DWM’s 2Q22 Market Commentary

July 06, 2022

Hope you had a nice 4th of July holiday weekend! We had an exciting drive back from a relative’s lake house. Perfect timing to drive home between nine and ten o’clock given that’s the popular fireworks display time. So not only did we get to enjoy the fireworks of a dozen different communities as we headed south, we also had the light show from the storm brewing right behind us coming from the north west. We’ve done that drive before and never had so much activity. Which basically sums up the investment environment right now, i.e. there is just so much activity right now, so many different variables, a seemingly overwhelming amount of negatives yet many positives, and just a huge amount of uncertainty. We’re in uncharted territory. The second quarter GDP results in July may come out and suggest we’re already in a recession, which is bizarre given we are still near unemployment record lows with huge labor demand. The US consumer continues to spend even with inflation ticking in at the highest levels in four decades. Covid appears to be under control but has caused all kinds of aftershocks that we will be dealing with for plenty of time to come. And lest we forget about the horrendous war that continues in Ukraine and the mass shootings in this very country of ours. The news and social media just parlays the bad news into a raging inferno. Which doesn’t bode well for the markets. In fact, 2022 has just been a miserable year for virtually every investor with stocks and bonds correlations high and returns both down big. Let’s get under the microscope and diagnose this patient, see how the asset classes fared in 2Q22, and evaluate how the patient may return to health.  

Equities: Stock markets sank in the second quarter with all major benchmarks except the Dow falling into bear market territory. (For more on bear markets, see our recent blog on them here.) A late June rally provided some relief but still painful to see the S&P500 down over 16% for the quarter and about 20% for the year. International markets have fared a little better with the MSCI ACWI ex-USA off 13.7% and 19.4% respectively. It’s bad for sure, but one must be reminded how good it has been the last several years as evidenced by the chart below. It’s been an almost straight up line since early 2008, the lows of the Great Financial Recession. It should also be noted that the S&P500 is now trading at a forward P/E ratio of 15.9 which is below the 25-year average of 16.9. That’s a healthy sign!  

Fixed Income: Not fun to experience equity returns like those mentioned above, but it’s not out of the norm. Equities are known for their big volatility, i.e. their big swings. Fixed income is not, which is what makes 2022 such an aberration. The worst calendar year return for the Bloomberg US Aggregate Bond Index in the last four decades is only -2.9%. That index was down 4.7% in the second quarter alone and now down over 10% year-to-date! Unprecedented and ugly. As we explained before, what used to be seen as a safe haven for retirees and others looking for stable albeit lower returns, this asset class has been turned upside down by tightening monetary policy as the Fed hikes rates to try to combat the highest inflation readings in decades (see graph below). Negative returns can and will happen when rates move up quickly.

Alternatives: Amongst all the red, alts have proven to be a helpful spot in one’s portfolio. Commodities* (down 6.8% for 2Q22 & up 14.4% for 1H22) and managed futures** (up 5.3% for 2Q22 & up 19.5% for 1H22) have been a couple of the only areas with positive returns in 2022. A study by JP Morgan showed that adding a modest allocation of alts to a traditional portfolio of just equities and bonds increased returns and reduced risk as shown in the slide below. For more info on why alts are an important piece in one’s overall portfolio, please see our recent blog on investment policy. For the record, the Wilshire Liquid Alternative Index, a broad proxy for multiple liquid alts, was -3.9% for 2Q22 and -5.1% for YTD 2022.

To sum it up, not much has worked in 2022. The Fed could have put the brakes on last year and the folks in Washington could have stopped the easy money earlier, but those things didn’t happen plus we had the Omicron surge and more supply issues with China’s zero tolerance approach. It’s an ugly storm but just like the one we tried to outrun the other night, storms do go away and clear blue skies inevitably reappear.

Corrections make for better valuations – and that’s in pretty much every area because almost everything has come down. Further, this market is acting healthy in punishing those with bad balance sheets and rewarding those in better shape. Fundamentals and valuation matter again! Amazing after some of the strange movements seen in the last few years.

Before we let you get back to some hopefully fun summer activities, we’ll leave you with this compelling slide below which says in times of bad sentiment like now, the subsequent stock market returns are typically the best. Sentiment is so negative right now – it’s at an all-time low reading per the chart below – that any good news could lead to better times. Don’t ever forget that the market is forward looking. As bad as the news and social media make it out to be, the market inevitably returns to achieve new all-time highs.

As much as I love the 4th of July and all its activities, we’re now looking forward to a period of no new fireworks or storms! We know if we stay the course, eventually clearer skies will come!

Brett M. Detterbeck, CFA, CFP®


* represented by the Eaton Vance Parametric Structured Commodity Fund
** represented by the Credit Suisse Managed Futures Strategy Fund

Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page