Second Quarter 2022

Until we advance into the next expansion, the importance of adhering to timetested investing principles cannot be overstated.

A 1970s-style inflation shock and aggressive Fed tightening pressured first-half returns across most asset classes. World economies, stocks, and bonds struggled as the excess liquidity injected into the economy during the pandemic continued to drain from the system.

Doubling down on first-quarter losses, the S&P 500 fell again in the second quarter, dipping into bear market territory and marking the worst first half since 1970 for the index. Within the US, every stock sector, style and size experienced losses during the quarter. Most of the destruction over the past six months was due to price-to-earnings (P/E) ratio compression—an overall reset of the stock market’s valuation downward to account for a new investment backdrop with a higher cost of credit.

Defensively oriented sectors performed best during the quarter, including Health Care, Consumer Staples, and Utilities, while cyclical sectors performed the worst. Energy remains the only sector in the black for the first half of the year—a beneficiary of extreme supply and demand imbalance. Central bank tightening, the war in Europe, and China’s lockdown created economic uncertainty that led to investment losses across international markets as well.

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