August 2022 - Market Update

Key Observations

After an impressive rally off of the June 17th lows, stocks stalled in August and gave back half of the made-up ground. Investors appear less confident in the drivers of the initial rally - falling gas prices, better than expected earnings and a general belief that maybe, just maybe, the market was hitting peak inflation. However, Chairman Powell’s Jackson Hole speech renewed concerns of higher interest rates for longer and continued disruptions in Russian energy pipelines weighed on markets. The August jobs report was stronger than expected, which fed the fears that higher rates will be needed to slow inflationary pressures. None of these factors are “new” and we believe that earnings, energy and Fed speak will continue to drive the direction of markets.

Data Dashboard

*Data Source: Bloomberg. As of 8/31/2022*

Stock Market

Stocks fell in August, led by two of the largest sectors; Technology and Health Care. Energy stocks added to their gains for the year, finishing up 2.65% for the month and now up more than 47% for the year. While the returns in the energy market are significant this year, it is worth noting that the Energy sector had a 5-year loss of -7.35% PER YEAR (35% in aggregate) in the 5 years leading up to COVID, not even counting the 50% decline during the initial COVID crash. Point being, sectors can have incredible returns in short-periods. What will be the next sector to boom or bust? We will have to wait and see.

The next best performing sector this month, Utilities, was up 0.53% in August and acted true to form as a defensive position. Stocks finished the month down 16% year-to-date, and it will take a combination of lower inflation expectations, steady consumer trends, and more dovish fed-talk to kick-start a rally heading into the end of the year.

XLE (Energy Sector)

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August Monthly Returns (by US Sector)

Bond Market

The US Treasury yield curve shifted dramatically higher in August, causing further declines in bond prices. The 2-year treasury yield increased by 0.60%, ending at 3.50%. Bonds with exposure to credit risk (i.e., corporate bonds) felt the added pressure from the declining stock market, making low-grade credit the underperformer of the month. While the bond market is typically the place to hide in a declining stock market, it has been difficult to maintain values in many traditional bond sectors this year. On the bright side, new money invested in bonds are getting much higher yields than we have experienced in more than a decade, but it will take time for existing bond holdings to recover.

Economics

At the Federal Reserve’s annual meeting in Jackson Hole on August 26th, the resounding message remained that the Fed’s work to combat inflation was not over and the policy actions would not change course anytime soon. Chairman Powell stated “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” The Fed’s European counterparts echoed the same message that despite recession risks, policy makers must forge ahead to bring down prices.

The August jobs report showed continued strength in the labor market. Nonfarm payrolls rose by 315k, in line with expectations and a slight increase in the unemployment rate was driven by more workers returning to the workforce. Overall a strong but “not too strong” report that does not appear to push the Fed to act more aggressively than its current course.

Tactical Updates

For Tactical Equity portfolios, we ended the month of August with largely the same positions as we began the month. Utility and healthcare sectors, Japanese equities, BioTech, and lithium battery companies remain our core holdings and have held up nicely against the broader market downturn. Throughout the month, we sold out of China to cut losses and added exposure to both renewable energy and fossil fuels. Additionally, we repositioned our BioTech exposure to be more even-weighted among the S&P BioTech industry index.

As for Tactical Fixed Income portfolios, we ended the month of August in a more diversified and aggressive portfolio (credit-wise) than in previous months. We closed out of our exposure to treasury bills and municipal bond funds in favor of three other class types. We purchased high yield corporate bonds, ex-US international bonds, and mortgage-backed securities which have each followed the global aggregate investment grade index benchmark in negative returns for the month of August (albeit not as pronounced).

General Client Considerations

This is a friendly reminder that the deadline for taking your RMD (required minimum distribution) from your retirement accounts is coming up. If you are 72 years old or older, your 2022 RMD needs to be taken by 12/31/2022. If you turned 72 in 2022, you may delay your first distribution until 3/31/2023 (but you will need to take both this year's and next year's RMD in 2023). If you have any questions about your RMD or need assistance in setting up the distribution, please reach out.

Please remember that we are here as a partner to answer your questions and advise you to the best of our ability. As always, if you have any questions or concerns regarding your account, please reach out.

Thanks,

The Friedenthal Financial Team

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