Capital Market Review - June 22, 2022

The past few months have been much of the same narrative for markets:

• Inflation concerns.
• Tighter monetary policy.
• Higher interest rates.

All three have led to volatility in the stock market and concerns that the economy might enter a recession. These factors point toward the Federal Reserve being one of the most critical factors in the future direction for both the economy and the stock market.

Following a higher-than-expected inflation report, markets entered a bear market, followed by the Fed raising interest rates by 0.75%. This was the largest increase since 1994, when the Fed raised rates by the same amount.  The first reaction saw markets increase, cheering on the Fed’s hard stance on inflation and pledging to do all they can to reel in multidecade highs in price increases. Initial reactions did not last long as the markets began questioning how long inflation could remain at these levels and, maybe even more importantly, can the Fed institute a soft-landing, meaning decreasing inflation without causing a recession.

Recent years have brought a constant stream of headlines enticing investors to move money to the next great idea. Cryptocurrency, SPACs, NFTs, meme stocks, and really any stock growing, whether it was making money or not. In a time of easy monetary and fiscal policies, investors were rewarded for taking additional risks and may have even stepped outside their comfort zone.

As risk has reentered markets, we are reminded of the importance of diversification and understanding precisely what a portfolio owns, not what made the most money in the most recent period.

If we look at how some of the big winners of the last bull market are currently performing, it is not a pretty picture. In fact, about 10% of stocks in the Russell 3000 Index are trading more than 80% lower than their most recent high. While this may sound like an enticing investment opportunity, remember these stocks are not guaranteed to recover fully, and even for those that do, the recovery time is unknown. Looking back to the Tech Bubble in the early 2000s, at least one company has never made it back to its all-time high during the height of the tech craze. While there will be stocks that fully recover this time around, meaning they need to increase more than 400% from their current price, not all will be a great investment. While speculative investing can be fun on the way up, all good things must come to an end. In times like these, we are reminded that the time-tested investing principles many investors wrote off in recent years are built for a full market cycle and meeting investor goals over the long-term--not for a short-term craze.

Author: Joe Clark, CFA | Research Team | Allegheny Financial Group | June 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.