by Richard Cull
July 2022 Market Recap & Commentary
The month of July was a positive one for all asset classes. The returns were almost a mirror image of last month with both illustrating the speed with which markets can rise and fall in times of extreme uncertainty. The investment community is very divided about whether asset prices have bottomed or are witnessing a relief rally.
July's sizable positive returns against the backdrop of slowing economic growth, rising inflation, and uneven consumer spending fits with the old adage that “the market is not the economy.”
There were three main drivers of the month's performance. First, Fed Chair Jerome Powell and Treasury Secretary Janet Yellen said the economy is not in a recession. Despite the first two quarters of 2022 being reported as negative, by definition a recession, many economists agree with them and point to the strong labor market.
Second, after raising interest rates another 0.75%, Chairman Powell indicated that future hikes are not guaranteed and may not be as large depending on future economic data. The next Fed meeting is not until September so they will have time to observe the effects of their rate hikes this cycle.
Third, the second quarter earnings reports have been mixed which is better than the market feared. Certain sectors of the stock market (technology, energy) have posted solid earnings while others (retail, financials) reported lower numbers and warned of weaker results ahead. Nearly 3,000 companies will report their numbers over the next two weeks providing some clarity into A) what happened in the second quarter and B) what companies anticipate for the remainder of 2022.
To this point we realize our recap of July is heavier on economics and devoid of our normal take on emotion and sentiment. Our justification as we like to include in almost every narrative…we are fundamental, long-term investors, believing asset prices are ultimately based on corporate earnings. Those earnings, in a macro sense, are a result of the economy. As Benjamin Graham (Warren Buffet’s mentor) once said, “in the short term the stock market behaves like a voting machine, but in the long term it acts as a weighing machine.” Applying that 1934 insight to 2022, the market fell in the first half of the year not because of lower earnings but as a result of lower sentiment (voting). At Centric we are focused on the long-term health of the economy and the level of earnings it will foster (weighing). For us, each quarter-end reporting provides more information in a far less distorted form and reinforces our confidence in the markets over the coming years.
The Risk Number is at the heart of a sophisticated set of tools to precisely measure the appetite and capacity for risk that each client has, and demonstrate their alignment with the portfolios built for them. The following graphic shows the risk of various asset classes as measured on a scale of 1-99 (1 being the most conservative and 99 being the most aggressive) as of the date above.
We start with a Risk Number, a measurable way to pinpoint how much risk you want, need, and already have. Then, your wealth advisor will optimally allocate our investments to help you reach your financial goals. Along the way, you will receive transparency of information, seamless proactive service and the trust and accountability you need to stay on track. All of this will lead to your personal comprehensive investment strategy that is powerful, disciplined, responsive.
Centric’s Market Assumption Disclosures: This information is not intended as a recommendation to invest in any particular asset class or strategy or product or as a promise of future performance. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in US dollar terms unless noted otherwise. Given the complex risk-reward trade-offs involved, we advise clients to rely on their own judgment as well as quantitative optimization approaches in setting strategic allocations to all the asset classes and strategies. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. If the reader chooses to rely on the information, it is at its own risk. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, or tax advice. The outputs of the assumptions are provided for illustration purposes only and are subject to significant limitations. “Expected” return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns. Asset allocation/diversification does not guarantee investment returns and does not eliminate the risk of loss.
Index Disclosures: Index returns are for illustrative purposes only and do not represent any actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Riskalyze Disclosure: The Risk Number® is a proprietary scaled index developed by Riskalyze to reflect risk for both advisors and their clients. The Risk Number is at the heart of a sophisticated set of tools to precisely measure the appetite and capacity for risk that each client has, and demonstrate their alignment with the portfolios built for them.
Shaped like a speed limit sign, the Risk Number gives advisors and investors a common language to use when setting expectations, recognizing risk and making portfolio selections. Just like driving faster increases hazards, a higher Risk Number equates with higher levels of risk.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.