Despite a 1% surge on Friday, the Dow (-1.3%), NASDAQ (-4.1%), and S&P 500 (-2.2%) each fell for the week. Conversely, taxable and tax-free municipal bonds rose about 0.5% - 1% for the week, showing some signs of a trend reversal in the bond market. The 10-year Treasury yield has dropped to 2.9%, down from almost 3.5% only three weeks ago. This is another example of “bad news is good news”, as will be explained later.
Let’s start with some gloomy statistics. For the first half of 2022, the Dow lost 15.3%, worst in 60 years (1962), the NASDAQ lost 29.5% for the worst ever, and the S&P 500 lost 20.6%, the worst in 52 years (1970). Let’s couple that with a 12% drop in the bond market, the worst in 42 years (1980), and that spells an awfully ugly start to the year for nearly every investor with a balanced portfolio consisting of stocks and bonds, as there was virtually no place to hide. In our actively managed portfolios, we ranged from -9.5% (conservative) to -17.7% (aggressive). For the month of June, portfolios were down from 3% to 7%, outperforming our benchmarks during both time periods. Still very disappointing and dismal, though.
As I have stated for months now, it’s all about inflation and the Fed’s response to combat it. An early peak at Q2 GDP points to another negative quarter, indicating that the US is unofficially now in a recession. While still positive, economic growth is slowing because of inflation and the Fed raising interest rates. That said, it is said that the bond market is “smarter” than the stock market and a better forecaster of the economy. Interestingly, the bond market has priced in interest rate hikes for the remainder of the year but has priced in a rate cut in March 2023. That implies that the Fed will consider inflation under control and will need to take measures to begin boosting the economy again. Hence, bad news is good news, and the stock and bond markets are reacting favorably to the possibility of the Fed easing in eight months. While that seems like a long time to wait, the stock market is a leading indicator of 6 – 9 months, so that could spell some relief. It can’t come soon enough.
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About the Author: Michael Menninger, CFP®️