Inflation vs. Recession – Will The Second Half Be Better?

By JR Gondeck on July 8, 2022

For most investors, the end of the quarter could not come quickly enough. The first half of 2022 saw the worst performance for the S&P since the 1970s, while the Nasdaq recorded the worst start to the year on record[1]. The Barclays aggregate bond index declined nearly 18%, highlighting the strength of individual bonds and active management. The only places of relative safety were high dividend stocks and cash. Inflation concerns gave way to fears of a potential recession as economic activity slowed and the Federal Reserve aggressively raised interest rates. The worst seems to be behind us, but we remain cautious as we await earnings season and company guidance on future growth. Company reports will give more insight and provide selective opportunities to invest cash reserves we have built up.

The Federal Reserve of Atlanta projected that we are already in a recession. Stock prices are typically a leading indicator dropping well ahead of a recession and beginning to recover before it is confirmed. Inflation pressures in the commodity sector are also showing signs of easing. Oil, copper, lumber, and other key commodities have fallen over 20% in the last month. The price reduction eases inflationary pressures and gives the Federal Reserve more flexibility on interest rate hikes. The anticipated interest rate increases dropped, paving the way for a more accommodative monetary policy and enabling companies to resume growth. 

One unique characteristic of the last quarter is the rapidly rising interest rates. The increase in interest rates has created interesting opportunities in the bond market and has helped solidify financial plans for many families we work with. With interest rates up ~2%, the amount of money needed to generate income decreases significantly. This also removes future incentives to take on additional risk and provides a safer investment opportunity for the long term. Safety of assets while earning a higher interest rate can help de-risk portfolio while leaving the door open to shift back to growth as the economic landscape becomes more attractive.

The recent market decline has reset expectations and taken asset prices back to the start of 2021. Recovery will take time, but economic activity is returning to pre-pandemic levels. The housing market and used car market are a few examples. Bidding wars have slowed or ceased, allowing people to view multiple homes and plan projects. Used car prices resumed depreciating. With the backdrop of a strong economy and labor market, the asset prices should follow once earnings reveal how companies are adjusting. We will continue to be cautious through the earnings season and expect volatility to subside once we get through the next Federal Reserve meeting at the end of July. Economic activity suggests stock prices have the potential to move higher from current levels by year-end.

Financial planning and incremental portfolio shifts will become more important in the second half of the year. The financial plans we create are typically very conservative, and with current bond rates generating higher levels of income, the time is right to lock in higher yields for longer. With asset prices down, there are additional estate planning opportunities to consider. Please contact us if you would like to check in on your portfolio and review your financial or estate plan.

[1] Bloomberg Data