Portfolio Strategy Review Q2 2022

by | Jul 18, 2022 | Portfolio Strategy


The second quarter continued the negative trends that we saw in the first quarter. Interest rates and inflation increased, though there has been recent price relief in the housing, energy, and other commodity markets.
The labor market remains strong with unemployment at a record low 3.6%. But cracks may be appearing in the economy. Are markets reacting to recession fears, inflation threats, more rate hikes, or reverting to reasonable value after years of being propped up by low rates? What is a signal and what is noise?

The Economy, Inflation, and the Fed

Seventy percent of the US economy depends on people buying goods and services. Consumer spending is strong, but consumer sentiment is very low because inflation is still running very high at 9.1%. The federal reserve is trying to reduce inflation by raising interest rates. Stock, bond, and real estate markets have declined as a result.
The Fed is targeting 2.0% inflation; the long-term average is 3.0%. But the Fed’s toolset is limited. Their actions could do harm to the economy and may not fix inflation. Below is a list of competing tensions that influence prices.
Inflationary or Disinflationary: the Fed’s monetary easing lowers rates and enables inflation; monetary tightening raises rates and slows credit and economic activity.
Inflationary: energy price pressures are often determined by geopolitical factors (wars, sanctions, etc.). Its more complex today because we have global pressure to move toward renewable energy sources. The Fed can’t influence global supply and demand, nor global environmental mandates.
Inflationary: Re-globalization or regionalization of global supply chains. Evaluations must go beyond low cost consideration. For example, if the US brings manufacturing jobs home, that will mean permanent price increases but a more reliable source. The Fed can’t influence this.
Deflationary: Technology lowers cost, raises efficiency, and exerts a deflationary force.

Inflation or Recession, But Not Both!

Though many believe the economy is strong and that consumer and business balance sheets are in good shape warning indicators are flashing:
• Layoffs in the news; some say due to over hiring.
• Low-end consumers are maxing out their credit cards.
• Inverted yield curve (when short term rates are higher than long-term rates)
• Recent commodity price declines (including copper, often seen as an indicator of future economic activity because it is used in many end markets).

Portfolio Risk Management

When we design your portfolio, we look to balance risk and return. Managing market risk is about preserving capital and minimizing declines for your time horizon. We expect stock prices to be volatile. Not so with bonds.

Bonds are the stable, least risky part of the portfolio. But they aren’t risk free. We have just experienced the worst bond market decline since 1842. US Treasury bonds are called risk-free assets but only because they are assumed to have no default risk. But all bonds have interest rate risk. Which means when rates rise, the price of an old bond paying lower rates declines because newer bonds pay higher market rates.

It’s not correct to blame all of the inflation on Putin. But it is correct to say that he is responsible for some of it. The war may also unearth risks we don’t fully understand at this point. How will Europe manage the winter months? Will NATO allies remain friendly if they are competing for scarce resources to stay warm this winter?

A Silver Lining

Portfolio declines are never welcome. But bond income is rising with interest rates, and stock valuations are lower which translates into more portfolio income and better buying opportunities. Social security recipients can expect a double digit increase next year, though partially offset with higher Medicare premiums.

Health and Wealth Perspective

I was recently in Michigan for my mom’s 81st birthday! It was great to spend time with her and she is doing great.

Unfortunately, a couple of my old friends from high school are not doing so great. One has an aggressive form of leukemia and is due for a bone marrow transplant. The other has Hospice as part of his weekly routine. Both have been given slim odds of surviving 3-6 months.

Don’t forget to make time to smell the roses, savor the scenery, and spend time with people you enjoy.

Jerry Matecun – Founder, President
Expert guidance to plan your future, preserve your lifestyle, and retire with confidence. For a confidential consult, contact me at jerry@compoundvalue.com.

PLEASE NOTE: You can’t invest directly in an index. Past performance does not guarantee future performance. All investments are subject to risk, including possible loss of the money you invest. Diversification does not guarantee profit or protect against a loss. Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. For details please see Disclosure.

Advice that Matters for business & personal financial insights