June Quarterly Markets Review

The financial markets continued a very volatile second quarter, on top of the first three months. The large market indexes fell double digits: S&P 500 down 16%, Dow Jones Industrials down 11%, and NASDAQ Composite off 17%. Assets outside of stocks did not hold up well enough overall to mitigate a balanced portfolio’s drawdown in value. Individual stocks often fall more that the averages; Apple shed 21% in the quarter; Warren Buffet’s Berkshire Hathaway stock fell 22%. The chart below shows the S&P 500 Index for the past year; with the December high and June low highlighted in yellow. That shows a 24% decline in price from peak to trough.

Bonds fell along with stocks, as the three interest rate hikes by the Federal Reserve since March re-priced bonds for the higher market rates (when interest rates rise, bond prices fall). Corporate bonds shed 7-8% in price, while U.S. Government securities felt the pain also. On the interest rates, a 3-month U.S. Treasury Bill paid 1.70% at June’s end, vs. about zero (0.05%) New Year’s Day. The 10-year Treasury Note now pays 3.00%, up from 1.50%, a double. Here's a table of the closing U.S. Treasury yields and Bank CD's also on July 12th.

 While buyers of fixed interest investments: Bills, Bonds, Annuities - finally see some hope for interest earnings, borrowers are on the down-side seat of that teeter-totter. Everything from auto loans to mortgages to credit card rates have ratcheted higher in the past 6 months. While existing home sales prices have ballooned to an median average $407,000 last month, home affordability is disappearing for many Americans, especially first time buyers.

On that point, the 30-year fixed mortgage rate for borrowers is now 5.50% – 5.75%, way up from the average of 3% for all of 2021; that’s an extra $450-$500/month for a $300,000 loan! That’s a tough nut for many homebuyers to crack, especially since the cost of most all of life’s needs are running hot: food, gas, travel to name a few.

If the goal of the Fed is to tamper demand to lower asset prices (inflation), that just may work. Inflation is expected to stay around 8% year-over-year for the next report, due out tomorrow, (July 13^th @ 8:30 a.m.), so keep a close eye on that.

Historically commodity prices tend to rise when inflation heats up. Oil and Gas prices have risen quite steadily this year. The only market sector that made money through mid-year was Energy. Our long-standing position on owning Gold continues to be in-force. Gold has NOT performed well enough to offset much of the stock and bond losses. Gold reversed course the past three months. After a $135 gain in quarter one, it gave most of that back, -$125, in the second quarter. Year-to-date, Gold gained just $11 for the six months, to $1,817 / ounce. 

The best way to frame it is that Gold held steady and did not lose money, so any allocation to Gold helped your overall performance of your stocks, bonds, Gold and Cash holdings. As covered in last quarter’s market recap letter, we were pretty excited to see Gold rally past the $2,000 mark to $2,070 in early March as Russia invaded Ukraine, but that rally quickly faded. Lastly, year over year ending June 30^th, Gold gained 3% in value while the stock market sold off 9% to 11% on the Dow Jones and S&P 500. Gold can erupt with big moves, so we’re patient owning Gold as part of our portfolios.

So what does this mean for our investments as this bear market (a 20% decline) unfolds? First, all bear markets end. The average downturn is about a 35% decline (since 1957), so we  Also, the average bear market lasts about 13 months. BUT, averages can be very deceiving since all bear markets unfold differently. The 2000-2002 bear market was 30 months, while the 2020 bear market (COVID-19 related) was just 33 days! The 2007-2009 bear market took 17 months to complete. If we toss out the 2020 oddity, we’re looking at 14 months normally; that would take us to about February-March, 2023, but I don't have space here to list all the ways that could be really inacurate.

Lastly, the time spent in market downturns or Bear Markets is small compared to Bull and Non-Bear Markets. In the 65 years measured since July, 1957, we were in a Bear Market just 17% of the time. A full 83% were spent in either sideways or Bull markets. That’s a stat I wouldn’t want to bet against as an investor and stock-holder.

If you are a long-term investor, and not a trader, I advise to set your allocations to your investments where you feel comfortable; Stocks, Bonds, Gold (or commodities) and Cash, and then add to them over the next 6 months if you can, reviewing them at year-end. This could well be a transition year where we see little gains or appreciation from the lows set in mid-June.
If the June low’s hold near S&P 500 3,666 level, then the Bear may be finished at just 6 months. But we’ll need a big 30% rally from the June S&P low to get back to the all-time market highs set in late-December 2021. That’s a tall order, so we’ll stay alert and keep invested so we don’t miss the start of the next BULL market.

Thanks for reading.
~Barry Unterbrink
Unterbrink@usa.net