Broker Check
Weathering the Storm

Weathering the Storm

July 07, 2022

July 7, 2022

Dear Clients & Friends,

As the calendar has turned to July, investors would certainly like to forget the first six months of 2022.  The first half of the year was full of surprises: sky-high inflation, the biggest selloff in bonds in four decades, a plunge in tech stocks rarely matched in history, prolonged supply chain bottlenecks from the Great Shutdown, war in Europe, and the implosion of crypto.  Nevertheless, the Independence Day holiday does bring with it reasons for celebration.  Not only is it the 246th birthday of the United States of America, but July has historically been a pretty good month for stocks.  Over the past 10 years, the month of July has been particularly good, with the S&P 500 Index averaging a solid monthly gain of about 2%.

Both stock and bond markets have been challenging this year, but it’s important to focus on what this means moving forward.  Since the end of WWII, after the S&P 500 Index drops 15% or more in a quarter (the Index dropped 16% in Q2), the index has gained an average of 6.2% the next quarter, 15.2% the following two quarters, and 26.1% the following year, rising every time.  Stocks have also historically bounced back strongly after two bad quarters (down 21% YTD), with an average gain of 8.5% the next quarter, 21.5% the following two quarters, and 31.4% the following year, according to LPL Research.  The good news with prices already dropping so much in 2022 is that the future likelihood of significant stock market returns going forward looks promising (see the chart above).

Despite the market volatility, many portions of the U.S. economy remain relatively strong.  However, easing growth expectations over the last few months have many investors worried—LPL Research now expects U.S. real GDP growth to be around 2% in 2022 (down from 4% earlier this year).  Front-and-center are the persistently high inflation readings, and while we should expect those to subside, they have lasted longer than most experts expected.  High consumer cash balances and a relatively strong job market (3.6% U.S. unemployment rate) offset some of the growth slowdown caused by inflation. Taken together, it is very likely that the U.S. consumer has some tools to weather the inflation storm, though it would be nice to see some near-term improvement in inflation to maintain such confidence in the consumer.

The apparent rightsizing of the historically negative correlation between stocks and bonds has been a welcomed development.  For several months now both bonds and stocks have been going down in unison.  That price action sparked talk of the demise of the moderate 60/40 stock bond portfolio—a conjecture that may be overdone (although future return expectations should be reset accordingly).  Nonetheless, the dual weakness in both stocks and bonds has been decidedly uncomfortable for many investors.  This relationship has been normalizing in recent weeks, indicating some reappearance of the historical pattern.  Notably, the Federal Reserve’s policy response on inflation will be an important barometer here.  However, long-term rates do historically tend to peak prior to the Fed ending its interest rate hiking campaigns, which could be good news for bonds in the coming months.

In terms of the stock market, it is quite possible some relief from the price pressure could be on the horizon.  Many indicators are pointing to oversold conditions, although evidence of complete capitulation remains spotty.  In our view, any good news on the inflation front could spark a rally.  This may come to pass, especially if a recession can be averted in 2022 as most economic analysts are predicting.  However, should the U.S. economy indeed fall into recession, the consensus is indicating a shallow recession may be a likely outcome.  Meanwhile, we are clearly rooting for an improved monthly inflation reading that could help revive the bulls.  Maybe America’s birthday can kick-start some optimism.  

At Mercer Partners, our core investment principles remain unchanged.  We are long-term, goal-focused, planning-driven advisors, continually striving to help our clients make smart money decisions and avoid costly financial mistakes.  As part of our proprietary wealth management process, Mercer 360°— we build broadly diversified portfolios of high-quality investments that are appropriately aligned with your financial goals.  We look for superior companies that have consistently demonstrated the ability to increase earnings (and in most cases dividends) over time, thus supporting increases in their long-term value.  We believe in the power of markets and want to fully capture market returns.

We believe acting continually on your financial and investment plan offers you the best chance of long-term success; we do not overreact to current events, no matter how distressing they may be.  After nearly 30 months of chaos—with the global pandemic and its several variants, a bitterly partisan election, soaring inflation (most painfully with gas price increases), the supply chain mess, war in Europe and imminent fears of an upcoming recession—we're all understandably exhausted.  That’s when the impulse to capitulate—to abandon your well-thought-out financial plan—becomes strongest.  So that's when the impulse must be resisted at all costs.  And that's our job—to keep you focused on the things that matter and the things you can control.  Everything else is just noise.

Thank you for being our client.  Please contact us if you have any questions—that’s exactly what we’re here for.


Important Information

Nick Enzweiler is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC.  Investment advice offered through Strategic Wealth Advisors Group, a registered investment advisor.  Strategic Wealth Advisors Group and Mercer Partners Wealth Management are separate entities from LPL Financial.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All data is provided as of July 6, 2022.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All index data from FactSet.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.