2022 Midyear Executive Summary

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OVERVIEW

Markets rarely give us clear skies, and there are always threats to watch for on the horizon, but the right preparation, context, and support can help us navigate anything that may lie ahead. So far, this year hasn’t seen a full-blown crisis like 2008–2009 or 2020, but the ride has been very bumpy. We may not be flying into a storm, but there’s been plenty of turbulence the first part of 2022. How businesses, households, and central banks steer through the rough air will set the tone for markets over the second half of 2022.

The sources of turbulence are clear. A global economy that was already vulnerable to inflation from supply chain disruptions, tight labor markets, excess stimulus, and loose monetary policy came under more pressure when Russian aggression in Ukraine added sharply rising commodity prices and pushed Europe into what may be the brink of a recession. The effects have included renewed pressure on interest rates, which hurt bond investors and contributed to tightening financial conditions, and a much more aggressive stance by the Federal Reserve (Fed) and other global central banks. Add in the typical market challenges of a midterm election year and the third year of a bull market, and it’s not surprising it’s been a bumpy ride. Understandably, rising prices, slowing economic growth, and a challenging first half for both stocks and bonds have many investors on edge, and fatigue from more than two years of COVID-19 measures doesn’t make it any easier. But markets are always forward looking, so it’s important to remain focused on what lies ahead. There will most certainly be challenges, but there are also some tailwinds from a strong job market, still resilient businesses, and the likelihood that inflation will soon start to slow. Markets historically can even get a little lift from lower uncertainty around elections as midterms approach.

Turbulence cannot be avoided, but it also need not deter us from making progress toward our financial goals. LPL Research’s Midyear Outlook 2022: Navigating Turbulence is designed to help you assess conditions over the second half of the year, alert you to the challenges that may still lie ahead, and help you find the smoothest path for making continued progress toward your destination. When times are turbulent, the surest path toward progress remains sound financial advice from dedicated professionals who have logged many hours in similar conditions. Please reach out to me with any questions.

July 2022 Client Letter

July 6, 2022

Dear Valued Investor,

As the calendar has turned to July, investors 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%.

Both stock and bond markets have been challenging this year, but it’s important to focus on what this tends to mean looking forward. 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. Taken together, we believe the U.S. consumer has some tools to weather the inflation storm, though we are going to need to see some near-term improvement in inflation to maintain our confidence in the consumer.

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.

In terms of the stock market, we believe some reprieve from the price pressure could be in the offing. Many indicators are pointing to oversold conditions, although evidence of complete capitulation remains spotty. In our view, any good news on the inflation front could spark a rally. This may come to pass, especially if a recession can be averted in 2022 as we expect. Should the U.S. economy indeed fall into recession, the consensus is indicating a shallow recession may be a likely outcome. Meanwhile, we are indeed on-guard for an improved monthly inflation reading that could help revive the bulls. Maybe America’s birthday can kick-start some optimism. Please contact me if you have any questions.

Sincerely,

Wayne Rigney


Important Information

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.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All data is provided as of July 5, 2022.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All index data from FactSet.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

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