Second Quarter Market Commentary
Neither the stock market, nor the bond market, were ambiguous this quarter. The MSCI ACWI net Index, a diversified world stock index retreated -15.66% while the Bloomberg Global Aggregate index, a diversified world bond index, was down –8.26% last quarter. Both asset classes sunk as inflationary pressures pushed the Federal Reserve to raise interest rates by 1.25% over two meetings last quarter.
We expect to hear the word “recession” echoed on tv and print over the coming months. This part of the economic cycle is full of uncertainty and often fear, but we remain steadfast in our belief that an economic slowdown is what is needed to maintain a healthy economy.
While the financial news sometimes hides behind jargon that assumes everyone remembers the economics of supply and demand, we think it’s worth walking through the scenarios more directly.
The Federal Reserve is trying to slow down the economy. They do this by creating economic speed bumps. As the cost to borrow increases, demand decreases. The goal is to decrease demand long enough that supply can catch-up. Once supply levels out against demand, prices usually come down.
Basically, we have been driving 80-mph and the Federal Reserve has thrown us into a 20-mph school zone. As painful as it is, the school zone is important. Sustained, uncontrolled inflation is disastrous for our long-term wealth. To have a strong economy that fosters a healthy investment environment, it must be brought under control.
As a silver lining, higher rates also help the US Dollar remain a strong currency, allow for higher interest returns in lower risk investments, and give the Federal Reserve some breathing room for rates to be lowered when we need to stimulate the economy again.
The question weighing on the market is “how slow is slow enough, and what will it cost in the process”? The stakes are high. The economy could slow so much that wages lower, unemployment increases, and consumers purchase less causing lower demand. In that case, supply would outpace demand and (does this sound familiar?) prices would decrease. Slowing too much increases economic pain but it also resolves the inflation problem.
We cannot stress enough that long-term high inflation is much more detrimental to your long-term wealth than a short-lived recession. While recessions must be given proper consideration, they historically last around 2 to 18 months and are often followed by a faster pace, expansionary environment.
Our financial strategy for you has been mapped for the school zones and the highways. We will travel through them together more than once. We are happy with how the changes we made last year are working, and we continue to monitor the market for additional opportunities. At the risk of taking this metaphor too far, the school zone is not our favorite place to be, we are prepared to navigate it on our way to better roads ahead.
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