by Aaron Izenstark, CIO

Market UpdateJuly 25, 20220 comments

Market Update | Interest Rates Increases and Inflation – Q2 2022 Recapped

What to Know

The second quarter of 2022 saw significant declines in both equity and bond markets. Interest rate increases and inflation are largely to blame.


Chain Effect

With further interest rate increases and a growing risk of recession, financial securities have been forced to reprice.

Inflation also continued to move higher in major economies around the world with numerous central banks hiking rates.

The U.S. Federal Reserve indicated that there would be more interest rate increases than initially estimated and noted the difficult task of bringing down inflation without triggering a recession.


The Real Question

The question remains whether the current inflation is supply-side driven (lockdowns, sanctions, supply chain disruptions) or demand-driven (too much stimulus and quantitative easing).

The Federal Reserve cannot fix supply-side driven inflation; they can only impact the demand side by extracting liquidity and increasing interest rates.

The most recent estimates by the Federal Reserve Bank of San Francisco suggest that both supply and demand are currently driving inflation.


Outlook

We have seen a massive repricing of asset classes driven by rising interest rates and inflation. This has hurt both bonds and equities with only commodities performing well.

If the economy truly enters a recession, we could see more turmoil and a reversal of certain asset class trends (e.g., high quality bonds will trend up, while commodities will trend down).

We believe the best approach is to invest in a diversified portfolio that matches your personal risk tolerance. Over time, small adjustments should be made to the portfolio as market opportunities and asset prices change.

It is also important to recognize that declines in asset classes bring down their valuations and increase the probability of better long-term returns. As assets re-price for the current economic regime, we will continue to adjust our portfolios in pursuit of attractively priced assets and to limit downside where we can.