Current Market Update and Outlook June 2022 | Pathstone

Market Update and Outlook

As we approach the midpoint of the year, uncertainty has rattled the markets and much has changed in a short six months. From a business cycle perspective, we are either in a mid-cycle slowdown digesting the normalization of interest rates, or we are approaching a contraction in economic activity. Our market cycle dashboards remain in positive territory, but we are closely monitoring trends and probabilities that might cause them to turn bearish. So much uncertainty persists that one must carefully weigh the probabilities of each outcome. Given the datapoints we received from the Fed this week, we are re-underwriting our Stress Test Scenarios to be able to explain better the potential outcomes from here and to determine appropriate portfolio positioning and action. You should expect to hear from your advisor with more details in the coming weeks.

The Fed, Inflation, and Interest Rates
The Federal Reserve announced its decision to increase the Fed Funds rate by 75 basis points (0.75%) at the conclusion of their June meeting. As a result, the upper end of the Fed Funds range is now 1.75%, still quite low by historical standards. Chairman Powell confirmed that the American economy remains very strong. Nonetheless, the Fed took the more aggressive step this meeting because inflation has remained more resilient than they had hoped. They shared an update to their economic projections highlighting more moderate expectations for GDP growth in 2022-2024, a slightly higher unemployment rate, but also a belief that inflation (Personal Consumption Expenditure or “PCE”) can drop to 5.2% by year-end 2022 and 2.6% by the end of 2023 on its way to the Fed’s target of 2%. The Fed also ratcheted up its expectations for the Fed Funds rate to levels more in-line with what the market was already expecting (3.4% in 2022, 3.8% in 2023 and 3.4% in 2024).

The Business Cycle
Rolling back to 2019, pre-pandemic, the economy was growing, but not much above a stall rate. The pandemic hit and drove the global economy into recession. Fiscal and Monetary policy unlike any we have seen before quickly sedated the economy to prevent more serious complications. The treatment was sufficient to bridge the gap and give the economy a firmer foundation from which to bounce back. We had a significant recovery led by financial markets with the economy following in its footsteps. Whatever the cause, whether the stimulus, supply-chain disruptions, geopolitical events, or something else, we have now found ourselves caught in the vice of inflation.

Home prices and rents have increased dramatically, we cannot find enough people to fill the roughly eleven million job openings, wages have shot up significantly as a result and demand for goods still outstrips supply. All signs of a strong economy, but also factors that the Fed is trying to slow down as it tries to tame inflation by raising interest rates and reducing its balance sheet. The risk is that they do not just slow the economic momentum but bring it to a stop. We put a roughly equal weight that this will just be a mid-cycle slowdown versus a recession.

Market Outlook
Stocks and bonds have significantly repriced since the beginning of the year. Equities have reached bear market territory (down 20%+) and bonds have not been spared either with one of the worst drawdowns on record. Equities are fairly valued today if not undervalued in some cases as forward Price-to-Earnings multiples for the S&P 500 Index sit in the 16x range, comparable to the average over the last 25 years. A brighter future for returns awaits, assuming we do not experience a contraction in earnings. In the bond market, we have seen quite an adjustment, but note that we do not currently see yields reflecting much in terms of future inflation expectations, nor concerns about future credit risk via credit spreads.

The entirety of the Pathstone team continues to work diligently to assess new data as it comes in and to proactively communicate our views. Times like these are where discipline and sound process can make the most difference in your future financial outcomes. We encourage you to reach out with any questions in the meantime.

This presentation and its content are for informational and educational purposes only and should not be used as the basis for any investment decision. The information contained herein is based on publicly available sources believed to be reliable but not a representation, expressed or implied, as to its accuracy, completeness, or correctness. No information available through this communication is intended or should be construed as any advice, recommendation, or endorsement from us as to any legal, tax, investment, or other matters, nor shall be considered a solicitation or offer to buy or sell any security, future, option or other financial instrument or to offer or provide any investment advice or service to any person in any jurisdiction. Nothing contained in this communication constitutes investment advice or offers any opinion with respect to the suitability of any security, and this communication has no regard to the specific investment objectives, financial situation, and particular needs of any specific recipient. Past performance is no guarantee of future results. Additional information and disclosures on Pathstone are available via our Form ADV Part 2A, which is available upon request or at www.adviserinfo.sec.gov.

The information provided in this report was prepared by members of the Investment Committee (“Committee”) of Pathstone. The information provided herein is intended to be informative and not intended to be advice relative to any investment or portfolio offered through Pathstone. The views expressed in this commentary reflect the views and opinions of the Committee based on data available as of the date this report was written and is subject to change without notice. This commentary is not a complete analysis of any sector, industry, or security. Individual investors should consult with their financial advisor before implementing changes in their portfolio based on the opinions expressed. The information provided in this commentary is not a solicitation for the investment management services of Pathstone.

This commentary may not be reproduced, redistributed, retransmitted, or disclosed, or referred to in any publication, in whole or in part, or in any form or manner, without the express written consent of Pathstone. Any unauthorized use or disclosure is prohibited. Receipt and review of this commentary constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this commentary.

Offices

Scottsdale, AZ

Contact & Locations

Los Angeles, CA

Contact & Locations

Naples, FL

Contact & Locations
Street view of Winter Park Florida Pathstone Office

Winter Park, FL

Contact & Locations

Englewood, NJ

Contact & Locations
Aerial view of New York City

New York, NY

Contact & Locations

Atlanta, GA

Contact & Locations

Austin, TX

Contact & Locations

Boston, MA

Contact & Locations

Bellevue, WA

Contact & Locations

Seattle, WA

Contact & Locations

Washington, DC

Contact & Locations