MARKET INSIGHT Q2 2022

Market Review and Commentary

As the Federal Reserve ratchets up the tightening of monetary policy in the U.S., it is no surprise what is happening in the U.S. equity markets. As of this writing, the U.S. equity markets — by most any measurement — are firmly in bear market territory with nearly all indices now down at least 20% or more from their recent peaks. The Fed and Congress are primarily responsible for the wave of inflation that is moving across the country and, indeed, much of the world. The culmination of many years of loose monetary and fiscal policy has landed us in the “inflation soup,” as an endless creation of money injected into the economy, at a time when goods and services are scarce, has produced the same result every time.

Over the past few years, the Fed has monetized nearly $8 trillion of debt created with freshly printed dollars. Additionally, Congress has spent many trillions of dollars that have also been injected into the economy. Now we find ourselves in the proverbial “economic soup” with stubbornly sticky inflation of well over 8%. Mid- to low-end consumers have generally been suffering the most as rising food, energy, and housing expenses take a much bigger bite out of their discretionary income. Paul Volcker taught us that to break the back of inflation, we have to get the Federal Funds rate well above the current rate of inflation and leave it there until demand is broken. This worked to break the double-digit inflation in the early 1980s.

Although the start of 2022 for fixed income securities has been rough, with the 10 Year Treasury bond yield moving from 1.5% to 3%, we do not expect it to continue to the same degree during the second half of the year as bond prices move inversely to yield. What we have seen is adversity creates opportunity.

It has been well advertised that the Federal Reserve will continue to raise the Federal Funds rate this year and likely into next year to tighten monetary policy and slow inflation. Throughout our history, we have used individual bonds versus packaged bond funds. This allows a predictable cash flow regardless of daily pricing. Plus, we can take a prudent approach to credit quality and coupon structure, benchmark duration, and consider clients’ income needs and tax-planning strategies.