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Q2 kicked off amid unabated inflation, Federal rate hikes, Omicron lockdowns in China, and continuing hostilities in Ukraine. Investors were unnerved and stocks dropped in response. Entering May, markets extended their losses as the concern turned to whether the Fed could raise rates to fight inflation without sending the economy into a recession. Month-end rallies in May and June respectively saved investors from deeper losses, but not enough to take the edge off of the “glass half-empty” current investor outlook for global economic growth.

In contrast, while stock prices were coming down, first-quarter corporate earnings were notably strong, especially in light of the Q1 GDP contraction. However, earnings for the second quarter are anticipated to be more mixed. Prices stabilized as the quarter closed with falling energy prices and declining bond yields triggering hopes that the Fed may not need to be as aggressive with rate hikes as previously thought.


ECONOMIC CONDITIONS: U.S. – Expected Slowdown

GDP: After shrinking 1.5% in the first quarter, signs point to continued GDP weakness in the second quarter. [6] This economic weakness reflects several headwinds, including elevated inflation, rising interest rates, continuing supply chain issues, and slowing global growth.

LABOR: The labor market is still healthy. Hiring continues to be strong, if somewhat off the pace of earlier post-pandemic quarters. Unemployment is steady and near historic lows and wages are rising, though below the rate at which prices are rising.

HOUSING: Mortgage rates are volatile as economic growth slows due to fiscal and monetary drags. With rates the highest in over a decade, home prices at escalated levels, and inflation continuing to impact consumers, affordability remains the main obstacle to homeownership for many Americans. The most popular U.S. home loan – the 30-year fixed mortgage – rose to 5.70% by end of the second quarter.


INTERNATIONAL: Lockdowns and Energy Dependence

Global economies struggled in the second quarter as COVID lockdowns in China exacerbated the ripples felt from Russia’s invasion of Ukraine. These lockdowns reduced overall consumer demand from China and further stressed global supply chains as manufacturing output slowed and exports delayed. Consequently, many economists have reduced their estimates for Chinese growth. How China’s economy performs in the future may turn on whether China’s zero-COVID policy remains in place, how it manages its deteriorating housing market, and how it balances the dynamism of private enterprise with state controls.

As in the U.S., European economies were weighed down in Q2 by rising inflation and monetary tightening policies. But Europe’s higher level of dependence on Russian energy sources means that any improvement in Europe’s economic prospects may rest heavily on how quickly the war in Ukraine is resolved.

The United Kingdom’s inflation rose to 7% during the second quarter. The Bank of England estimates that inflation will likely increase to 11% by year-end even as the U.K. economy falls into contraction by the fourth quarter. [17]

Japan’s 2022 economic growth rate has been pared by global conditions, though the IMF increased its estimate of Japan’s 2023 economic growth rate to 2.3%, up by 0.5%. [18]

The World Bank is exhibiting caution, having downgraded its global growth expectations to average 3% between 2023 and 2024. [19]


EQUITIES: Inflation Worries

U.S. EQUITIES: U.S. equities fell in Q2 as investor focus was trained on inflation and the policy response from the Federal Reserve (Fed) for much of the period. The Fed enacted its initial rate hikes during the quarter and signaled that there would be more to come. Even so, the central bank admitted the task of bringing inflation down without triggering a recession would be challenging. The large-cap S&P 500 Index dropped nearly -20% while small cap firms fared the worst as the Russell 2000 Index shed -23.43%.

DEVELOPED INTERNATIONAL EQUITIES: The second quarter saw further steep declines for eurozone shares as the war in Ukraine continued and concerns mounted over potential gas shortages. Higher inflation is also denting consumer confidence, with the European Central Bank (ECB) poised to raise interest rates in July. The MSCI-EAFE Index, which tracks developed overseas markets, slid 15.37% in Q2. [20]

EMERGING MARKETS: Emerging market equities experienced a fall in Q2, with U.S. dollar strength a key hurtle. The Latin American markets of Colombia, Peru and Brazil were among the weakest markets in the MSCI Emerging Markets Index. A combination of rising concern over a global recession, domestic policy uncertainty, and late-quarter weak industrial metals prices contributed to declines in equities and currencies. Emerging Markets as a whole, as measured by the FTSE Emerging Market Index, fell 11.43% during the quarter. [20]


FIXED INCOME: Hawkish Outlook

U.S. FIXED INCOME: At first, bonds continued to sell off sharply, with yields markedly higher amid still elevated inflation data, hawkish central banks and rising interest rates. By quarter-end, bonds rallied amid rising growth concerns, slightly curtailing the negative returns. The Fed implemented a series of hikes, raising the policy rate by 75 basis points (bps) in June for the first time since 1994. At the same time, Fed officials cut 2022 growth forecasts. The US 10-year bond yield rose from 2.35% to 2.97% and the two-year yield from 2.33% to 2.93%.

DEVELOPED INTERNATIONAL FIXED INCOME: Data throughout the quarter showed inflation rates in major economies continuing to run at multi-decade highs, with various central banks raising interest rates and others signaling their intention to do so soon. European yields were volatile as the central bank indicated it would end asset purchases early in Q3 and raise rates soon after. This sparked a pronounced sell-off in Italian yields in June. The ECB sought to calm concerns, calling an extraordinary meeting to discuss an “anti-fragmentation” program likely entailing some form of support for heavily indebted nations. The German 10- year yield increased from 0.55% to 1.37% with Italy’s up from 2.04% to 3.39%, hitting as high as 4.27% in June. In the U.K., the Bank of England (BoE) implemented further rate hikes, bringing the total to five in the current cycle, raising its inflation forecast to 11%. The U.K. 10-year yield increased from 1.61% to 2.24% and two-year rose from 1.36% to 1.88%.


QUARTERLY FOCUS: The Dreaded Bear Can Bring Opportunity

After briefly rallying at the end of Q1, most markets resumed their downward slide in Q2 and have now officially entered into bear market territory: a pullback of 20% or more from market peaks. According to most economists, rising inflation, ongoing geopolitical events, and higher interest rates have all pointed to the likelihood of a recession in the next 12-24 months. Investors may be asking themselves: “how much worse can this get? Should I sit on the sidelines and wait this out?”.

Even if history doesn’t repeat itself, it often rhymes. Studying the patterns that follow previous declines of 20% can help investors establish a guidepost to making smart moves within a depressed market. The table above outlines bear markets in the S&P 500 since WWII. In the center column, we have the dates in which the index fell 20% from its nearest peak. The columns on the right show subsequent one, three, and six year returns from those dates. It illustrates that while the overall declines continued, the market was positive 71% of the time one year out, 92% positive three years later, and positive 100% of the time six years later.

If the current pullback continues, keep in mind that the market attempts to price in these risks ahead of time – and often hits its bottom before a recession is actually confirmed. And this is what makes trying to precision-time a market bottom extremely challenging: by the time the bad news hits the headlines, the market has already started its climb back out of it. The good news is that the savvy investor can still take advantage of market lows with the comfort of history’s strong suggestion that higher prices are waiting down the road for patient long-term investors.


DPWM OUTLOOK: An Active Gameplan

Another outcome of the second quarter appears to be the end of a major advantage enjoyed by U.S. stocks for the previous decade: the TINA trade (There is No Alternative). The TINA trade resulted from historically low-interest rates that left other asset classes at a return disadvantage to stocks. Low interest rates contributed to a multi-year bull market by elevating the value of future earnings and forcing many income-searching investors into equities simply because bond yields were so small.

Fast forward to today’s new market regime of higher rates, less liquidity and an increased level of uncertainty. With the Fed promising to continue to raise rates until inflation- reduction target points are hit, that uncertainty may continue through the second half of the year. Furthermore, price pressures remain in place as the monetary policies take time to work their way through the system. Perhaps the biggest market overhang is whether the Fed can manage inflation without sending the economy into a recession, and it could take months to a year to determine whether the Fed successfully threaded that needle.

In addition to inflation and other economic data, investors will be watching corporate earnings. The outlook for profits has dimmed in recent months amid a slowing economy. If earnings results can exceed the market’s lowered expectations, corporate earnings may prove to be a positive catalyst in the months ahead.

The Fed’s pivot to higher rates impacted stock investors, and bond investors suffered (bond prices fall as yields rise). Nonetheless, bond yields are now higher than they were a year ago, making bonds, for many income investors, more attractive than they have been in a while. Moreover, interest rates now sit well above the paltry yields of just a year ago.

As seen in the chart on the page prior, yields across most Treasury maturities are nearing their 10-year ranges. The moves have been most dramatic at the shorter end of the curve as the bond market anticipates the well telegraphed rate hikes from the Fed: i.e., yields that were just 0.39% a year ago are now 2.80%.

Given these seismic shifts across market trends, you may be wondering how to navigate your portfolio’s success through the uncertainty. Here at DPWM, we are constantly monitoring these dynamics and assessing how we can best set up our clients to take advantage of timely opportunities. While our models are built with a long-term strategic framework, we remain vigilant and make tactical shifts along the way as conditions warrant. As the Fed moves its goal of “normalization” further along, we expect volatility to persist and with that more opportunities to make meaningful changes to our clients’ portfolios.




  1. NASDAQ.com, May 4, 2022
  2. CNBC, April 13, 2022
  3. Treasury.gov, July 7, 2022
  4. CNBC, May 27, 2022
  5. Factset, June 3, 2022
  6. Bureau of Economic Analysis, July 7, 2022
  7. Federal Reserve Bank of Atlanta, July 1, 2022
  8. Bureau of Labor Statistics, July 7, 2022
  9. CNBC, June 21, 2022
  10. WSJ.com, June 19, 2022
  11. Project-Syndicate.org, May 31, 2022
  12. Project-Syndicate.org, May 31, 2022
  13. CNBC, June 24, 2022
  14. International Monetary Fund, April 2022
  15. CNBC, April 26, 2022
  16. International Monetary Fund, April 2022
  17. Bank of England, May 2022
  18. International Monetary Fund, April 2022
  19. The World Bank, July 7, 2022
  20. MSCI, July 7, 2022
  21. WSJ.com, June 22, 2022
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