Stolper Perspectives For The Quarter ending June 30, 2022

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Herbert Hoover, America’s 31st President, who took office in 1929, the year the U.S. economy plunged into the Great Depression once said: “There are only three ways to meet the unpaid bills of a nation. The first is taxation. The second is repudiation. The third is inflation.” Food for thought as Labor Department data showed consumer price inflation accelerating to 8.6% in May and federal debt held by the public was $24 trillion at the end of last quarter. Inflation woes and fear of an economic downturn, or even a recession, weighed heavily on U.S. equities during the quarter, as did the ramifications of the ongoing conflict in Ukraine. Markets dislike uncertainty and it is not in short supply.

The S&P 500 closed on June 30th, 2022 at 3,785, representing a return of -16.10% for the second quarter and -19.95% for the first six months of the year. The more defensive Dow Jones Industrial Average (DJIA) fared relatively ‘better’ and ended June at 30,775 for a return of -10.77% in the past three months and -14.42% for the year-to-date. The S&P 500 reached a record closing high of 4,797 on January 3rd 2022, and the DJIA touched the same milestone on January 4th 2022, closing at 36,800. The index numbers are currently down 21.1% and 16.4% respectively from those peaks, and the markets officially entered bear territory on June 10th on the back of the hotter-than-expected inflation report.

Value stocks, a focus of Stolper Asset Management’s equity portfolios, have significantly ‘outperformed’ growth stocks year-to-date, but are still sharply down on aggregate. Energy, represented in all our portfolios, has trounced all other equity sectors, up around 30% so far this year, with all other sectors being in the red. The worst performing so far this year has been Consumer Discretionary, with Information Technology and Communication Services not far behind.

Volatility has been a theme for the U.S. equity markets so far this year. Uncertainty has been fueled by the interrelated trifecta of stubbornly high inflation numbers, the continuing war in Ukraine against Russia, and fears surrounding economic contraction. Following the May inflation report, on June 15th the Federal Reserve decided to raise the benchmark interest rate by 0.75%, marking the largest increase since 1994, as it attempted to tackle 40-year-high inflation numbers. This was on the back of a 0.50% increase in May. The current Fed funds target rate is 1.50-1.75%. Federal Open Market Committee (FOMC) members also raised its median projection to a range between 3.25% and 3.50% next year.

According to Raymond James’ Chief Economist, “The Fed has changed its tone, taking a more assertive policy stance regarding its commitment to bring inflation down to its 2% target. However, the new policy stance may increase the probability of a recession in late 2023.” Specifically, he currently believes there is a 60% probability of realizing a mild recession in the 2nd or 3rd quarter of 2023. At a late June conference, Powell acknowledged “We now understand better how little we understand about inflation.”

According to the Bureau of Economic Analysis, real Gross Domestic Product (GDP) decreased at an annual rate of 1.5% in the first quarter compared to a fourth-quarter 2022 GDP increase of 6.9%. The definition of a recession is somewhat nebulous, but the National Bureau of Economic Research defines it as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. Despite some headline fear-mongering, we’re not there.

Investors will have to temper expectations of earnings growth when comparing to this time last year. As the global economy reopened from pandemic-triggered lockdowns, at the end of the second quarter for June 2021 the S&P 500 earnings growth year-over-year was a whopping 91%. For the first quarter of 2022, this number had shrunk to 10% and Raymond James’ forecast for this quarter puts it at 5%. While the decline is substantial, it was neither unexpected nor surprising and, importantly, the numbers are still positive. Market participants are not just watching current numbers closely but also companies’ forward guidance. In the first quarter markets were rattled when firms signaled excess inventory levels, softening consumer spending, and pockets of ongoing supply chain disruption. With investors extra-sensitive to market signals, earnings beats and misses, as well as forward guidance could produce outsized price moves.

Although 10-year Treasury yields have dipped recently, reflecting a flight to safety as economic growth concerns rise, the rate has more than doubled from 1.52% at the end of last year to around 3.22%, having peaked at 3.48% on June 14th, the highest since 2011. Again, inflation is the primary driver (bondholders demand higher coupons if their capital will have less purchasing power in the future). With the cost of borrowing spiking for both institutions and individuals Fed Chair Jerome Powell, in his semi-annual testimony to Congress, acknowledged that a soft landing (taming inflation while avoiding a recession) will be challenging if the central bank sticks to its ongoing rate hike agenda. With mortgage rates, currently close to 6%, hitting the highest levels since 2008 and the average price for a gallon of gas at the pump approaching $5, not to mention higher prices for staples, the housing market boom is experiencing a cooling off in certain sectors and the consumer is feeling the crunch.

Not surprisingly consumer confidence figures dropped in June to a 16-month low. Inflation-adjusted retail sales dropped in May for the 14th consecutive month and real hourly wages have declined for more than a year. Still, initial jobless claims numbers are close to all-time lows and numbers indicate that there are almost two jobs available for every worker seeking a job. Unemployment has dropped sharply from double-digit levels in 2020 to 3.6%, near its lowest level in half a century.

Inflation had already started to bite before Russia’s February invasion of Ukraine, but the war has certainly added disruption to the world’s energy markets. The price of WTI crude reached its peak so far this year at $119.40 / barrel in early March and has since pulled back some to $105.84 / barrel. The conflict, and how best to exert economic pressure on the Kremlin, is a pressing topic in European countries heavily dependent on Russian gas. Russia’s government-controlled gas monopoly, Gazprom, has already cut off gas supply, fully or partially, to Bulgaria, Denmark, Finland, Germany, Poland, and the Netherlands. Additional countries may also be targeted by this political blackmail and the specter of energy shortages across the European bloc looms large.

The G-7 summit, a gathering of seven rich democracies including the USA, just wrapped up in Germany with the most prominent talking points centered around support for Ukraine’s efforts and how to impose new and harsher sanctions on Russia. Since the beginning of Russia’s invasion of Ukraine, the Biden administration has already approved more than $6 billion in assistance. Ideas discussed included a price cap on Russian oil purchases and a gold embargo, although it is unclear how the former could be enacted without broader international cooperation. Sanctions on Russia’s oil exports have been mitigated by the willingness of China, India, and others to continue purchases, and rising oil prices have made up for export volume dips. That said, in April Russian GDP was estimated to have decreased by 3% year-on-year having experienced positive GDP growth in the first three months of 2022.

India’s Prime Minister, Narendra Modi defended his country’s position and voiced concern that sanctions are damaging emerging economies around the globe. Meanwhile, Russia’s onslaught on the ground in Ukraine wages on with gut-wrenching human cost and no clear indication of the ultimate outcome. Ukrainian President Volodymyr Zelenskyy, joining the G-7 summit via video, pressed for more weapons and air defense capabilities.

The North Atlantic Treaty Organization (NATO) summit, a gathering of President Biden and leaders of the alliance’s 29 other member countries, is now underway in Madrid, Spain. Already, Turkey’s President Erdogan has dropped his objections to allowing Sweden and Finland to join NATO. President Putin had previously warned this could trigger the stationing of ballistic missiles and nuclear weapons on Russia’s border. Schisms are appearing throughout the global political and financial markets that will cause major reverberations for a long time to come.

On June 27th the White House said that Russia has defaulted on its international bonds for the first time since the Bolshevik revolution, over a century ago, as sanctions have effectively cut the country off from the global financial system. Russia refuted this, calling the default artificial, and countering that its payments were being blocked by intermediary institutions.

President Putin was welcomed at the 14th annual BRICS (an acronym for Brazil, Russia, India, China, and South Africa) summit held virtually this month. China’s President Xi declared before the summit that BRICS countries should “strengthen political mutual trust and security cooperation,” coordinate on major international and regional issues, accommodate each other’s core interests, and “oppose hegemonism and power politics.” Currently, BRICS represents about 40% of the world’s population and around 25% of the global economy. Since the summit both Iran and Argentina (with combined populations of over 130 million) have applied to join the increasingly influential BRICS. Contrary to the wishes of most Western developed nations, Russia is not isolated. Rather, world alliances are being tested.

Revisiting a checkered relationship, President Biden, is set to make a critical trip to Saudi Arabia in mid-July in a major diplomatic test for global oil supply. Biden is seeking commitments from the country and its allies in the Gulf to continue to ramp up output to help address the high price of oil. Biden’s efforts may not bear fruit given it is unclear how much spare capacity the nations have or are willing to use. In addition, the rest of the OPEC+ countries would have to be on board and, critically, Russia is a key member. At home, U.S. crude inventory in the Strategic Petroleum Reserve (SPR) has now fallen below 500 million barrels, the lowest since 1986. Over the last two weeks alone, the U.S. government has injected 13.7 million barrels from the SPR into the market.

This fight against high inflation is not limited to the U.S. Nearly four dozen countries have raised interest rates in the last six months. Notably, the European Central Bank announced its first hike in eleven years coming on July 1st, and the Bank of England implemented a fifth consecutive raise in June. One developed nation, however, stands apart.

This month the Bank of Japan reaffirmed its determination to hold borrowing costs near zero despite the Japanese Yen falling to a 24-year low against the U.S. dollar and its central bank’s exploding balance sheet. The Bank of Japan said it will continue to offer to buy unlimited amounts of 10-year Japanese government bonds at 0.25% every business day, and leave its short-term interest rate target unchanged at -0.1%. The Bank of Japan started Quantitative Easing (bond buying) as a temporary measure in 2001. Now, they just passed the dubious milestone of owning over 50% of the entire Japanese government bond market. The problem they face now is how they will ever stop buying without precipitating a complete collapse of the market. This is the end game of Modern Monetary Theory (MMT) playing out in real-time.

Comparatively, at home, reacting to the 2008 financial crisis the Fed introduced its own quantitative easing, raising its assets from $900 billion to $4.5 trillion. Later, with the pandemic, the central bank’s assets then almost doubled to now stand around $8.9 trillion, or over 35% of GDP. However, the Fed has stated its commitment to shrink its balance sheet starting this month in a relatively aggressive fashion. The quantitative easing that resumed in earnest in March 2020 will now give way to quantitative tightening (QT). Under its plan, the Fed’s balance sheet is forecast to shrink by around $520 billion this year. According to the Congressional Budget Office (CBO), in 2021 the Federal Reserve held 24.2% of Federal debt alone. Japan’s fate going forward should at least provide some valuable lessons.

It’s always more enjoyable to report on up quarters than down quarters, but it’s worth remembering that the stock market is not the economy. The market tends to be more forward-looking and prone to overreact to news. As Raymond James Chief Investment Officer Larry Adam puts it, “Two years ago, many experts thought that we’d be stuck in the world of COVID-19 lockdowns forever – but we aren’t.” It would be wrong to extrapolate the current environment out forever and so, as always, we focus on what is knowable and stick to our discipline of investing in durable businesses at reasonable valuations that can weather these market conditions.

Summer has only just officially started and things have already heated up outside. So we hope you are staying cool and enjoying your summer plans at home or farther afield. As always, we thank you for your trust and are always here for you to discuss your financial goals and position investments for long-term success through all stages of market cycles.


The S&P 500 is an unmanaged index of 500 widely held companies and over 80% of the U.S. equities market.  The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 companies maintained and reviewed by the editors of the Wall Street Journal.  The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the investment adviser representatives of Stolper Asset Management and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.  Investing involves risk and you can lose principal.  There is no assurance any strategy will be successful.  There is no guarantee that any forecasts made will come to pass.  Past performance may not be indicative of future results.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Dividends are not guaranteed and must be authorized by the company’s board of directors.

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