As the calendar has turned to July, investors and I would certainly like to forget the first six months of 2022. However, the Fourth of July Independence Day holiday does bring with it reason for celebration. Not only is it the 246th birthday of the United States of America, but July has historically been a pretty good month for stocks. Over the past 10 years, the month of July has been particularly good, with the S&P 500 Index averaging a monthly gain of about 2% Let’s hope it happens this month! Recently, I am grateful to have been at my 45th college reunion. Dave and I spent the following week visiting with his Mom and sisters in Seekonk, MA. I enjoyed visiting Bristol, Rhode Island which had the first Fourth of July parade in the United States. The town was in full decoration and reminded me of Willow Glen at Christmas time. Every building and home had American flags and bunting and all other 4th of July decorations. Even the street where the parade would take place was painted down the middle with red, white and blue!
As you know, both stock and bond markets have been challenging this year, but it’s important to focus on what this tends to mean looking forward. Please consider that after the eight biggest quarterly stock market declines since WWII, the S&P 500 rose an average of 6.2% in the subsequent quarter with gains in seven of eight quarters. Moreover, after the seven biggest two-quarter declines, stocks rose an average of 21.5% over the subsequent six months, rising every time.
Despite the market volatility, many portions of the U.S. economy remain relatively strong. However, easing growth expectations over the last few months have investors worried—we now expect U.S. real GDP growth to be around 2% in 2022. Front-and-center are the persistently high inflation readings, and while we do expect those to subside, they have lasted longer than our base-case expectations. High consumer cash balances and a relatively strong job market (3.6% U.S. unemployment rate) offset some of the growth slowdown caused by inflation.
The apparent rightsizing of the historically negative correlation between stocks and bonds has been a welcomed development. For several months now both bonds and stocks have been going down in unison, a relatively rare occurrence. That price action sparked talk of the demise of the typical 60/40 stock bond portfolio—a conjecture that we believe is overdone. Nonetheless, the dual weakness in stocks and bonds has been decidedly uncomfortable for many. This relationship has been normalizing in recent weeks, indicating some reappearance of the historical pattern. Notably, the Federal Reserve’s policy response on inflation will be an important barometer here. However, long-term rates do historically tend to peak prior to the Fed ending its interest rate hiking campaigns, which could be good news for bonds in the coming months.
As we focus on and take action on what we can control, let’s take time to enjoy the season of summer and the fresh corn on the cob, peaches and strawberries which are the hallmark of summer!
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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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All data is provided as of July 5, 2022.
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All index data from FactSet.
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