Article

July 2022 Perspective


Jul. 1, 2022

The Storm After All-Time Highs

It’s been a treacherous first half of the year, especially after starting it at all-time highs. As a reminder, the S&P 500 delivered 29% total return over the course of 2021. Now, and as of June 13th, the post-pandemic bull market is over, with the US stock market falling over 20% from its all-time high and marking the definitional start of a bear market.  

It’s no surprise that the S&P 500 closed out its worst first six months of a year since 1970, with inflation, rising interest rates, and a potential recession still dominating this post-pandemic period. Investors are reacting to weakening business and consumer sentiment, higher prices, and mounting recession fears. US equities finished the month of June down 8.4%.

In fixed-income, the US 10-Year Treasury yield finished the month at 2.98%. Ongoing rate increases and tightening by the Federal Reserve—to combat higher-than-expected inflation—drove up interest rates, continuing the narrative of rising yields and falling bond prices, challenging fixed income performance.

Our Perspective

This was not an ideal start to the year for every investor; however, our team has been monitoring and analyzing these factors for some time and planning accordingly.

Overall, given our gray outlook on conditions to come (i.e., bear market activity and pending recession), we are continuing to de-risk portfolios, having done so already in recent months. Although our belief is that the economic cycle is in mid-to-late stages, our expectation is not for an imminent recession, at this time. We are carefully monitoring conditions from all angles. Our top-down, macroeconomic teams and bottom-up analysts, each with their respective perspectives and an open, collaborative dynamic, will continue to guide our portfolios for whatever the rest of this year and markets deliver.

We’ve Poked the Bear. What Happens Next?

The significance of a bear market is not the percent down, it’s the representation that markets are going through a material contraction, for all the short-term challenges and long-term opportunities that one provides.

And it’s not just the stock market. The bond market’s response to rising interest rates has prompted the question of ‘Why own bonds?’

Our Perspective

The short (two-fold) answer is better starting yields and diversification, especially in recessions.  Because our market and economic outlook remains cautious with building risks and a probable recession, we believe bonds play an important risk management role. More details can be found in our recent ‘We’re in a Bear Market, Now What? article.

Can Processes Overcome Investing Biases? A BTS Look.

Disciplined processes make all the difference when investing, particularly during volatile times. Mix in the possibility of behavioral biases subtly infiltrating reasoning, analyses, and decision making, and the need for clear frameworks has never been more important.

Our Perspective

Formal, repeatable processes are paramount to our investment approach. We explored three tools that every fundamental, actively managed financial professional should incorporate into their investment decision making in Our Behind-the-Scenes Processes for Minimizing Investing Biases article.

Our View
Economic Cycle The economy is moving later cycle with speed; a recession in the US is becoming increasingly likely; the Fed is on a warpath against inflation, as it has found itself badly behind the curve and is being forced by high and persistent inflation to tighten into an already weakening economy; an earnings recession looms as US companies are also exposed to overseas economies, many of which are in worse shape that the US
Stock Market US stock market volatility has dramatically picked back up; market weakness, coupled with relatively robust earnings growth, has improved valuations incrementally; however, equities remain expensive by longer-term historical standards; elevated valuations may be partly explained by robust corporate profitability, as EBIT margins have climbed to historical highs; rising input costs are posing a risk to the ability of corporations to maintain this elevated level of profitability; returns will be harder to come by and stock selection will be increasingly important
Bond Market Interest rates have risen well off their lows reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads remain historically tight
Foreign Exchange While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly; the rise in geopolitical tensions has only increased uncertainty or made the environment less clear in the near- or medium-term
Important Issues on the Radar COVID-19: the worst of this economic crisis is behind us, and with multiple waves of the virus, including the Omicron variant, the attention is shifting to learning how to live with the virus; potentially impacting recovery, financial markets and currencies regionally
Ukraine-Russia War: we believe an environment of elevated geopolitical risks over the coming months would entail a general risk-off environment; lending upward support to the dollar, gold, and commodity prices
China’s Economy: China is an outlier regarding policy and has shifted to a gradual loosening stance while most of the developed world tightens aggressively; debt and property markets remain major issues; trade tensions continue to impact global trade and supply chains
Inflation: a confluence of massive policy stimulus, tight labor markets, gummed-up supply chains, and rising energy costs are causing inflationary forces to broaden and become more entrenched than previously expected; conflict in Ukraine and lockdowns in China have added to price pressures

Sources: Wall Street Journal, Refinitiv, FactSet.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc.

The S&P 500 Price Return Index is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The Index returns do not reflect any fees, expenses, or adjust for cash dividends. Index returns provided by Refinitiv. Index data referenced herein is the property of S&P Dow Jones Indices LLC, a division of S&P Global Inc., its affiliates ("S&P") and/or its third party suppliers and has been licensed for use by Manning & Napier. S&P and its third party suppliers accept no liability in connection with its use. Data provided is not a representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of these parties shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. For additional disclosure information, please see: https://go.manning-napier.com/benchmark-provisions

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