Dear Valued Client,

During the pandemic in 2020 and 2021, the world and markets had to adjust to a new landscape. We yearned for a return to normal. While the reopening has continued in 2022, it has had a different set of problems and has been both difficult and disappointing on several fronts. Pent-up demand met with a snarled supply chain disrupted the flow of goods. Inflation surged to levels not seen in decades.

After heavily stimulating the economy with ultra-low interest rates, the Fed apparently kept its foot on the accelerator for a bit too long. To cool the overheated economy, the Fed has raised interest rates three times this calendar year and has vowed to continue until inflation is under control. Throw in the uncertainty of the Ukraine invasion and markets were in for some tough sledding.

% Return as of 6/30/2022
Equity Indexes 2nd Q YTD 3 Yr
S&P 500 -16.1 -20.0 10.6
Russell 2000 -17.2 -23.4 4.2
MSCI EAFE -14.2 -19.6 1.1
Emerging Market -11.4 -17.6 0.6
Wilshire Reit -5.4 -14.9 7.4
Bond Indexes
Tips -6.1 -8.9 3.0
Aggregate -4.7 -10.3 -0.9
Government -3.7 -9.0 -0.8
Mortgages -4.0 -8.8 -1.4
Investment Corporate -7.3 -14.4 -1.0
Long Corporate -12.8 -22.7 -2.3
Corporate High-Yield -9.8 -14.2 0.2
Municipals -2.9 -9.0 -0.2

Few places to hide

Investment markets ended the first half of 2022 with both equity and fixed-income markets in the red. The S&P 500 lost roughly 20% year-to-date. Of course, as we have noted before, while painful, 20% declines are not uncommon. A bear market has occurred, on average, every 3.6 years. The last bear market was in 2020 – probably more recent than one might think.

What makes this decline feel somewhat worse is that rather than supporting the overall portfolio in troubled times, bond prices fell as well. The Barclays Aggregate, a measure of the total bond market, fell about 10% in the first half of the year even as stocks also declined. This is uncommon. Since 1926, there have only been two calendar years in which stocks and bonds both went down.

Prudent investing still works

Just because the decline was broad does not mean our long-held investment principles didn’t apply. As the Fed pumped money into the economy during the pandemic and recovery, speculation crept in. For some, it seemed more like a casino than the disciplined, prudent process it should be.

The financial media was abuzz with cryptocurrencies and SPACs (blank-check companies often with questionable structures and reporting). There were also wild swings in initial public offerings and “meme stocks” – shares of companies in hot sectors touted on social media.

Many of the speculators did not fare well. One of the leading cryptocurrencies was down about 60% in 2022 and has lost roughly 70% since November 2021. That at least is better than some crypto assets that went to zero. As for SPACs, the CNBC Post Deal SPAC Index is down over 50% in 2022.

Our approach embraces change and innovation, as they are vital to the growth of the economy and wealth. We also understand the capital we manage for our clients often came with great effort and sacrifice, so investments should be approached with thought and some degree of skepticism. We take no comfort in the losses of others. It does, however, reinforce our belief in restraint in both surging and declining markets.

Reason in the face of uncertainty; things can change quickly

There have been many reports in the financial media pointing out the declines of 2022. In many cases, they are quite true. Others are often distorted and fail to tell the rest of the story. The day following the end of the second quarter, the Wall Street Journal ran the headline, “Markets Post Worst First Half of Year in Decades.” The statistic is correct. The specific year was 1970, so over 50 years ago. What the headline did not reveal was that after suffering a 21% loss in the first half of 1970, markets abruptly reversed and gained over 26% in the second half, managing a slight gain for the calendar year. You can’t make this stuff up.

The road ahead

We are neither pessimists nor optimists. We are realists. We acknowledge the difficulties faced by the markets in the first half of 2022. The war in Ukraine unfortunately continues. Inflation, so far, has shown few signs of abating. There is a recession. While we have been through many difficult and uncertain periods, there could be more challenges ahead. That is just the nature of investing.

There are reasons for encouragement. Even though there has been some pain, it is encouraging to see central bankers take the threat of inflation seriously. With the rise in yields, there is a greater likelihood that in the years ahead, bonds will contribute a more reasonable return. As speculation has been wrung out of markets and valuations have come down, the opportunity for future gains has increased.

There is more to our approach than just repeating “stay the course.” For stay the course to mean anything, it needs to have substance behind it. That means doing the math. It means knowing our clients’ personal situations and goals. Then, we design portfolios in anticipation of risk rather than in response to it. We have done that.

We appreciate the confidence you have placed in us. We are here and ready to talk.



Sources: S&P Global, Federal Reserve, Barclays Aggregate, Wall Street Journal, JP Morgan Asset Management, and CNBC

1The S&P 500 consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value-weighted index with each stock’s weight in the index proportionate to its market value.

Past performance is not indicative of future results.