It's Been Bad Out There - SECOND QUARTER MARKET REVIEW

Robert E. Frey, CFP
                      Lakeside Advisors, Inc.
                           1115 East Denny Way
                        Seattle, Washington 98122

                                  July 2, 2022

                     SECOND QUARTER MARKET REVIEW

                              It’s Been Bad Out There

There is no sugarcoating the stock or bond markets in the first half of 2022. It has
been a very difficult environment for investors and very few places have offered any
relief from selling pressure. The primary cause of the decline has been
inflation. Persistently high inflation, with levels not seen since the 1980’s, are
creating concern about the current and future trends for businesses and
consumers. Further, the tools commonly used to control inflation have the
unfortunate side effect of slowing economic growth, leading to a potential recession
as monetary policy makers act aggressively to curb rising prices. With that said, there
are reasons for optimism in the future, and while things may look bleak now, history
tells us that recoveries can often come sooner and with greater force than we
anticipate.
Economic trends have been a mixed bag, with recent data reflecting a slowing US
economy and potentially recessionary conditions. On June 30, the Federal Reserve
Bank of Atlanta released their Q2 forecast of US Gross Domestic Product (GDP) that
is now negative 1%.1 If this estimate proves correct, it will be the second consecutive
quarter of decline in gross domestic product. This is the definition of a
recession. While the prospects of a recession are rising, the much more prevalent
fear is high inflation will remain with us for the foreseeable future. Gas prices
increased to record highs in mid-June and are up by 50%+ over the past year while
food prices have also climbed by 10%.2,3 Homebuyers are facing a near 20%
increase in home prices and with mortgage rates that have nearly doubled since last
June.4,5 The saving grace of the economy thus far has been a healthy job market, with
a very low unemployment rate of 3.6% and wages rising over 5% in the past year.6
In the stock market, the S&P 500 is in a bear market (down over 20% year to date)
and has experienced the worst first half start since 1970. The Nasdaq, which has
more exposure to growth sectors like information technology and biotech, declined
over 22% in the second quarter and is down 29% year to date.7 Despite the
significant decline in the markets, estimates of corporate earnings growth have
remained relatively steady.8 Skeptics will point to earnings as the “last shoe to fall”,

but if companies continue to show an ability to grow, stocks are now significantly
cheaper than they were at the beginning of the year.
When the stock market has periods of corrections, investors have typically looked to
bonds as a source of relief from volatile stock price declines. This year that has not
been the case. Bonds have an inverse relationship with interest rates - when rates
go up, bond prices go down. So, as the result of persistently high inflation, the US
Federal Reserve has raised the fed funds rate higher, pushing both short- and long-
term US treasury rates dramatically higher this year. As a result, US treasuries, often
used as a primary source of protection in client portfolios, are down 11% this year. If
the year ended today, that would be the worst performance on record since the data
was tracked dating back to 1973.9
As shown, it isn’t hard to find data that creates a negative picture of the economy and
a dour outlook for stocks and bonds. However, history would tell us that markets
often reward patient and prudent investors who stay the course even during difficult
times. Bear markets tend to be swift and painful while bull markets are slower but
last significantly longer. Of the 14 bear markets since 1945, the average decline was
32% but the time to recover losses was slightly less than 2 years.10 Further, since
1950, the average return for the 12 months after the initial entry into a bear market is
15%, which is higher than the long term average return of the S&P 500.11. Lastly, this
is a midterm election year, and historically performance of the S&P 500 leading up to
midterm elections have been below average, but the 12 months afterward have been
significantly higher than long term averages.12
To get a different perspective on our current situation:

   •   Stocks are less expensive than the beginning of the year and current
       valuations are below the five- and ten-year averages8
   •   Income from bonds, which has been extremely low since 2020, currently pays
       investors over 3% to hold 10-year US Treasury bonds and 4.85% for
       investment grade corporate bonds13

Simply put, while we may not be at the absolute bottom of the market declines,
achieving your financial objectives doesn’t require investors to be exact about timing
market tops and bottoms. In fact, attempting to time the markets often leads to
reduced returns as investors tend to act emotionally, sell low, and miss out on
substantial future rallies. The average S&P 500 return from 1926 to 2021 was
10.34%, but to achieve these returns, investors have to be willing to accept risk and
the potential for significant declines.14 The best and most consistent way to achieve
your financial goals is with a sound financial plan that incorporates safe assets for
markets like our current situation combined with growth assets that benefit from the
eventual rebound that history has repeated time and again.

1-https://www.foxbusiness.com/economy/key-fed-gdp-tracker-turns-negative-
signaling-recession-here
2-https://www.marketwatch.com/story/believe-it-or-not-gas-prices-have-been-edging-
down-ahead-of-fourth-of-july-heres-why-11656615912
3-https://ihsmarkit.com/research-analysis/us-vs-eurozone-food-inflation.html
4-https://finance.yahoo.com/news/home-prices-record-high-april-2022-
131118002.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvb
S8&guce_referrer_sig=AQAAAC3V7faNn0klmgwwK5uzVn5oVa7V4lv4Atk9_Y2X7fsC
20vtc_NvOTcbjMaQmEFfB0pQs7UsssI4ipq89IkFsOEuLPUBQ7f4LkOnMU0Pa56R7m
gfMLvWzQJH6c_YqK5lxK_fc1q2beFq985sX3Z-fm5vEVHmri5idU9j_a41bbH7
5-https://apnews.com/article/shootings-mortgages-mortgage-rates-
a7a2f3a9fb33ba412def9b7dbf030955
6-https://www.cnbc.com/2022/06/03/jobs-report-may-2022-.html
7 - https://www.cnbc.com/2022/06/30/stock-market-futures-open-to-close-news.html
8-
https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20De
sk/Earnings%20Insight/EarningsInsight_062422.pdf
9-https://www.reuters.com/markets/rates-bonds/brutal-first-half-puts-bonds-line-worst-
year-decades-2022-06-30/
10-https://www.forbes.com/sites/sergeiklebnikov/2022/06/29/stocks-are-crashing-but-
history-shows-this-bear-market-could-recover-faster-than-others/?sh=5637ecd5cc29
11-https://money.usnews.com/investing/articles/things-investors-should-know-about-
a-bear-market
12-https://www.usbank.com/investing/financial-perspectives/market-news/stock-
market-performance-after-midterm-elections.html

13- as of 6/29/22 https://www.ishares.com/us/products/239566/ishares-iboxx-
investment-grade-corporate-bond-etf
14-https://www.officialdata.org/us/stocks/s-p-500/1926?amount=100&endYear=2021