I know, I know, this report is coming to you a little after halftime. In my defense, waiting for the June inflation data made more sense than creating something that would be ready for the 4th of July weekend. No one pays any attention to markets or news leading up to a holiday weekend… right?
Please refer back to this post from May for a first quarter re-cap if your memory is a little foggy. What we’ll focus on in this post is what happened in May and June, as well as an evaluation of the present events and what they may mean going forward.
May: We left off in early May – the 5th to be exact – and it was raining – both literally and figuratively, at the time. From that point forward throughout the month of May, the markets were essentially flat. The Standard & Poor’s 500 (S & P 500) opened on May 5th at 4146 and closed on May 31st at 4138. Throughout the month of May the dialogue was much the same from commentators everywhere – – words and phrases such as “a recession is imminent” or “inflation may have peaked” – – were thrown around with ease. While no one knew that for sure at the time, the commentary did sound absolutely extraordinary. The fact is the month of May was the markets digesting the Federal Reserve’s actions of raising their key interest rates. No one knew if inflation had peaked, and no one knew the data to forecast a recession. The market digested the new interest rate environment for the month and waited for more data to be released. At this point, year-to-date, the S & P 500 was down 13.86%.
June: If any May flowers bloomed, they were immediately crushed in June. Within the first 10 days of the month, the May inflation data was released showing the highest 12-month increase since 1981. This data as well as the action taken by the Fed a few days later spooked the market even more. On June 15th, the Federal Reserve raised their key interest rate by 75 basis points. Ironically, the markets rebounded quite nicely following the announcement, as they had seemingly priced in that move in the days leading up to the decision. The Fed’s decision to act aggressively against inflation was met with a bit of relief, a bit of calm, and a bit of…. stability. The rest of the month was spent digesting other economic indicators that investors hoped may bring some early acknowledgment that the economy was either improving or continuing to move backward. At this point, year-to-date, the S & P 500 was down 19.57%.
Present Day: The question I’ve received most often from clients this year goes something like this, “When is this going to turn around?” You know my stock (pun intended) answer for that, “I can’t honestly say I know the answer.” What I do know, however, is the culprit here and what needs to happen for some optimism in the public markets. Public (market) enemy number 1 is inflation. Period. End of sentence. Inflation is the root cause of all the disruption we’re seeing and the continued reason why the market cannot figure out the right price for its companies. If inflation keeps increasing → consumers will not be able to keep up with prices → companies will not sell as much of their product → companies will receive less revenue → and down and down, we go. This is the reason why the inflation data and the Fed’s response to that data are under such a watchful eye – it’s the force driving the market right now. It is my assumption (although in no way a fact or a prediction) that once the public can see evidence that inflation has peaked and it’s beginning its descent, the markets will react accordingly (hopefully in a positive manner). That will mean the Fed’s use of their tools has worked, they won’t need to be as aggressive in raising interest rates – they may not need to make any raises at all – and the economy can square itself away accordingly.
The painful part about all of this is the timing. The inflation data comes out once a month, and markets are forward-looking – constantly looking into the future to determine if the companies inside each market are going to be profitable in the future. So, when we receive bad news in mid-July, the outlook for the rest of the month tends to be gloomy, until we can receive good news, etc.
The next question I continued to be asked is, “Where’s the opportunity and what should we do?” The opportunity lies within your planning. Tax-loss harvesting, Roth conversions, buying long-term equities at a discount, and potential other strategies that are dependent upon your specific plan. The opportunities to make money in this market have been few and far between – every major asset class is negative for the year. Every. Single. One. Hopping around from one asset class to another hoping to catch the right one will ultimately prove to be time not very well spent. The action items we should all be focused on now remain within your financial plan. Are you able to contribute cash to any specific account and buy long-term holdings at a present-day discount? Have you discussed a Roth conversion with your CFP®? Is there an opportunity to tax-loss harvest now, that will create an offset of income or gains in the future? That is where the action is, and where the opportunity lies.
Regarding the performance of the publicly traded investment world, well, I’ll leave that to the legend himself, Jack Bogle. “Owning the stock market over the long term is a winner’s game but attempting to beat the market is a loser’s game.”
Keep fighting the good fight.
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The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained in here are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services
 Retrieved on 14 July 2022 from: https://finance.yahoo.com/chart/
 Retrieved on 14 July 2022 from: https://finance.yahoo.com/chart/
 Bogle, J. C. (2017). The little book of common sense investing: The only way to guarantee your fair share of stock market returns. John Wiley & Sons, Inc.