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July 2022 Monthly Review

"Don't Worry, Be Happy"

By Loyd Johnson, Chief Investment Officer
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Loyd Johnson PhotoA Look Back

The above title comes from the 1988 song recorded by Bobby McFerrin. It was the first a cappella song to reach #1 on the Billboard charts. It was originally released in conjunction with the Tom Cruise movie, Cocktail. With its Reggae-style vocals and snappy rhythm, it has stood the test of time…and is especially relevant as we look at the month of July in the markets. We certainly slogged through the not-so-happy returns from the first half of 2022, so we are going to spend at least a little bit of time talking about the recent good. The large-cap S&P 500 was up 9.2% in July, marking the best monthly performance since November of 2020, and nearly 12 times the historical monthly return. By itself, the outsized bounce-back in July is another reminder of why it is so important to stay the course with your longer-term asset allocation. Indeed, including the first few trading days of August, the index has rallied over 13%, recouping more than half of the -24% YTD low made in mid-June. Other than International Emerging Markets, every asset class shown in the table above enjoyed positive returns. We mentioned in our last piece that we believed core bonds had a real chance to recover over the last half of the year with coupon rates edging higher. At least for one month, we did see that materialize, as the Bloomberg Agg returned over 2.4% in July. The month was dominated by headline economic news with most of the focus on the latest inflation readings. The June CPI release came in hot, with the year-over-year number showing a + 9.1% increase. The rest of the month was tempered with the idea that the Fed may not have to be as aggressive in their rate hikes as other indicators showed a slowing economy. Specifically, the first estimate of 2nd quarter GDP came out at -.9%, and fueled the debate of whether the U.S. was already in a recession, given two consecutive quarters of negative growth. Officially the NBER, the group responsible for declaring recessions, has not weighed in…and probably will not for some time. It is true that, historically, we have not experienced recessions when the unemployment rate is so low (3.6% in July). Also, consumers, although nervous about the future economic landscape, are still taking vacations, going out to dinner and spending discretionary money. We undoubtedly will have another recession, but there is reason to believe that it could/should be more narrow given some of these positive indicators.

A Look Ahead

It is always difficult looking 6-12 months down the road, and perhaps even more so right now. Inflation is one of the more invasive and soul-sucking economic scenarios. In the current environment, prices are higher on just about everything, and for the average wage-earner it can really start to affect life and financial decisions…and ultimately derail economic expansion. It is why the Fed has made it clear that it is their number one priority to tame inflation and get it back to the 2.5-3% level. We believe through the hike in short-term rates and other economic forces, inflation will eventually come down, but the devil is in the details. How much pain will we all endure to get there? There was surprising good news as the Jobs number just released on August 5th showed that nonfarm payrolls increased by 528,000 versus estimates of 258,000. The actual unemployment rate also ticked lower to 3.5%. In this bizarro world where good news could be bad for the markets, this could put further pressure on the Fed to get more aggressive with their rate hikes…and stock markets do not typically like that. And, so it goes. We believe that there will likely be more grinding and ups and downs as this all plays out. We remain slightly underweight to stocks, but believe it is fine being happy when you should, too.