- In the 1st half of 2022, stock and bond returns posted some of the worst returns on record.
- Persistent inflation and the imperative of central banks to combat it has raised the specter of recession.
- We remain defensively positioned with underweight allocations to stocks and bonds, and an overweight allocation to cash in anticipation of further market turbulence.
As we begin the second half of 2022, financial markets continue to struggle. Both stock and bond values have declined as interest rates move higher. American stocks had their most difficult first half of the year since 1970 while the bond market has produced its worst returns since 1842.
Investors around the world remain primarily focused on inflation. Globally, central banks are aggressively increasing interest rates to tamp down the highest inflation we have experienced since 1981. The COVID pandemic famously precipitated an unprecedented government response with the injection of trillions of dollars of monetary and fiscal stimulus. With all that money sloshing around the world’s economy, combined with extraordinary pent-up consumer demand resulting from lockdowns, supplies of inventories quickly dwindled and prices have been rising ever since. The challenge facing the global central bankers was underscored when Jerome Powell recently told a European Central Bank forum in Portugal, “We now understand better how little we understand about inflation”. Recently Powell has acknowledged the U. S. Federal Reserve Bank is prepared to continue increasing interest rates aggressively through year-end to slow down the economy and increase unemployment, at the risk of recession. We believe a recession is more probable than a soft landing for the economy. Despite the low unemployment levels, that recession may have already begun.
Our Pacific Wealth Management portfolios are weathering the volatility effectively and remain defensively positioned with underweight stocks, underweight bonds, and overweight allocations to cash. Over the last week, we partially increased bond allocations to take advantage of the dramatic increase in bond yields over the last six months. We also repositioned cash positions into a higher-yielding money market fund. Now that corporate quarterly earnings announcements have begun, Wall Street will be fixated on upcoming guidance and business projections for the balance of the year. At a minimum we expect financial markets to remain choppy.
We hope you are planning on some fun rest and relaxation with friends and family in these warmer months of summer. Please let us know if you have any questions, concerns, or comments.