Capital Market Review - 2nd Quarter 2022

Recession Worries

We began 2022 with the economy shrinking by 1.5% in the first quarter. The most significant drag was a record trade deficit, with imports far outstripping exports and less government spending. By definition, a recession begins with two consecutive quarters of negative GDP growth. Many began to wonder if we were indeed slipping into a recession. Forecasts are predicting +2.1% GDP growth for the second quarter citing strong business activity and growing consumer spending. But the Atlanta Fed’s latest estimate is a -2.1% decline in GDP, which would mean we are indeed in a recession. The official GDP data for the second quarter will be published on July 28th.

Ballooning Inflation

Inflation has quickly become the top financial concern for Americans. In mid-June, the national average price of gas broke $5 for the first time. Food inflation was more than 10% in the May CPI numbers. A contributing factor to the rise in energy and food prices is the war in Ukraine. Russia is not only a large oil exporter but also a wheat and fertilizer exporter. The last time inflation was this high was 40 years ago, in 1981.

Fed Tightening

CPI inflation of 8.6% far exceeds the Federal Reserve’s 2% target, leading to more aggressive Fed action. In March, they raised rates 0.25%, in May 0.50%, and in June 0.75%. The May hike was the largest since 2000, and the June hike the largest since 1994. The median projection among FOMC members is another 1.65% increase over the remaining four meetings of the year. The 30-year mortgage rate has doubled from 3% to 6%, and home sale activity is cooling.

Market Volatility

This year has been painful for investors. The sharp rise in both inflation and interest rates has jolted all asset markets. The S&P 500 has declined by 20%, leaving the U.S. equity index in bear market territory. The tech-heavy NASDAQ 100 is down nearly 30% for the year. The few sectors in positive territory are drug manufacturers, telecom, and energy and utility companies.

The Bloomberg U.S. Aggregate Bond Index fell by 11%, the largest drawdown since 1974. Meanwhile, Bitcoin and Ethereum are down 57% and 70%, respectively. And finally, gold and silver are down 1% and 15%, respectively. As you can see, there has been no shelter from this year’s volatility.

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Author: Jim Rambo, CFA | Research Team | Allegheny Financial Group | July 2022

The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.

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