IMG Q3 2022 Investor Letter

Keep Calm and Welcome Summer!

We welcome the arrival of summer with open arms, and with it unfortunately, continued economic uncertainty. During the first half of the year the markets have felt the weight of the Federal Reserve policy tightening and slower economic growth. Inflation remains high, talk of a looming recession is growing, and the prospect of weakened earnings can present an unstable environment. The S&P 500 is down almost 20% since the start of the year and the technology-heavy NASDAQ, where most of the damage was done, is down by nearly 30%.[1] Some analysts are projecting the bottom is near and the worst may be behind us. Although the tools used by the Federal Reserve to fight inflation may allow volatility to persist, panic selling is not recommended. While the stock market and our economy have experienced challenging times during the first half of this year, we have purposefully constructed our client portfolios to minimize downside risk through proper diversification, and believe there are appropriate protection measures in place to withstand this unpredictable period.

Enclosed you will find a look back on market and economic activities throughout the second quarter of 2022 from our team of experts. For additional in-depth analysis, you may view recordings of our team as they share insights on various local and national media outlets, as well as our weekly The Markets and the Economy email series at 

Key Takeaways from Q2 2022:

  • The Fed has signaled its intent to continue to raise interest rates in response to rising inflation.
  • The S&P 500 dropped 16.10% to end the 1st half of the year down 19.96%.
  • Equity diversification helped protect portfolios as market volatility picked up.

US Economy

Although real GDP grew 6.9% in the fourth quarter of last year due to continued easy monetary and fiscal policy, the first quarter of 2022 experienced a decline of 1.6% partly due to the Omicron wave of the pandemic. The Conference Board, a well-known non-profit business membership and research group that publishes economic forecasts, recently released a memo indicating that while they do not believe the U.S. economy is currently in a recession, they do believe the pace of U.S. economic growth will continue to slow over the course of the year. They predict U.S. real GDP growth will rise to 1.9% (annualized rate quarter-over-quarter) in Q2 2022 versus a     -1.6% growth rate in Q1 20222.

Presently, the U.S. labor market remains quite robust (as evidenced by a 3.6% unemployment rate) resulting in persistently high inflation and rising hawkishness from the Federal Reserve (Fed). The Fed has signaled its intent to raise interest rates over the coming months in response to rising inflation and the federal funds target rate is expected to end the year in “restrictive” territory, potentially rising to 3.75-4.00 percent in 2023. The combined forces of higher inflation and higher interest rates have the potential to curb consumer spending (which accounts for 70% of economic output) and business investment in the latter half of 2022 and into 2023. A scenario of falling revenues and persistent rising input and interest costs could mean that future corporate earnings expectations may be revised downward. Given this backdrop, the consumer’s near-term outlook for the U.S. economy dropped sharply to a decade-low, as evidenced by a 4.5 point drop in the consumer confidence index in June. This grim outlook was largely driven by increasing inflation concerns, particularly rising gas and food prices which are causing lower-to-middle class consumers to recalibrate their personal budgets. 

Near-term, there are some signs that consumer/business demand is holding up in spite of higher interest rates. Orders for durable goods rose in May driven by big-ticket items such as cars, computers, and military aircraft. In addition, the pending home sales index, an indicator of home sales based on contract signings, also rose in the month. While home-price growth slowed slightly, home prices still remained elevated up 14.8% in May from a year earlier, as competition for homes has remained relatively strong due to low supply. This is despite 30-year fixed mortgage rates rising to an average of 5.78%, the highest level since 2008 and well above the 3.11% rate recorded at the end of last year. Despite these positive consumer metrics, we are seeing mixed signals from corporate earnings thus far as beer, wine, and spirit producer Constellation Brands beat estimates and offered upbeat full-year guidance, while upscale home-furnishing company RH drastically cut its revenue outlook for 2022 citing a deteriorating economy and a slowdown in housing sales.

Inflation remains a hot topic as the consumer price index rose 8.6% year-over-year in May. This was driven by above-average inflation in categories such as gasoline, transportation, hotels, used/new vehicles, furniture, and food. Driving this multi-decade high growth in inflation are a number of factors including: elevated demand continuing to collide with supply constraints (e.g. chip shortages boosting auto prices), a war in Eastern Europe which has exacerbated energy and agriculture price inflation, and a zero-tolerance COVID-19 policy in China which entirely shut down portions of our global supply chain. As China reopens from additional COVID-19 lockdowns, supply chain disruption emanating from the region should hopefully begin to moderate.

While we can’t predict the future path of inflation, interest rates, or the economy, we will continue to favor high-quality companies that have strong competitive positions, significant pricing power, and require fewer fixed investments in the face of rising costs of capital.

[1]  GoBankingRates

[2]  Conference-Board.Org Conference Board Economic Forecast for the US Economy 6/21/2022

Traditional Asset Class Returns Q1 2022

Asset Class Benchmark Q2
US Stocks S&P 500 (16.10%)
US Gov't Bonds BbgBarc US Govt Intermediate (1.65%)
Cash BbgBarc US Treasury Bill 1-3 Mon 0.12%

US Stocks

After finishing the 1st quarter down -4.60%, the S&P 500 continued its downward spiral dropping another 16% to end the first half of the year down almost 20%. The market continues to digest and price in uncertainty around a wall of worries including persistent inflation, hawkish central banks around the world, the likelihood of a recession, geopolitical tensions and the inflation impact from the war in Ukraine, China lockdowns stunting economic activity and disrupting supply chains, and concerning reports of inventory gluts at major retailers such as Target and Wal-Mart.

All 11 sectors in the S&P 500 posted negative returns in the quarter. The more defensive Consumer Staples        (-4.62%), Utilities (-5.09%), Energy (-5.17%), and Health Care (-5.91%) sectors held up far better than the more cyclical Consumer Discretionary (-26.16%), Communications (-20.71%), and Information Technology (-20.24%) as investors flocked to safe-haven assets.

The market continues to price in higher interest rates and the expectation for additional rate increases. As a result, investors are now discounting back the future expected cash flows of companies at higher rates, resulting in lower equity valuations. This has caused longer-duration growth stocks or companies with cash flows that are further out (or have high expected future earnings growth rates), to decline more than the broader market. This is evidenced by Value stocks (Russell 3000 Value -12.41%), companies who appear to trade at low valuations relative to their future earnings potential and whose cash flows are expected in earlier years versus later years, outperforming  Growth stocks (Russell 3000 Growth -20.83%) by a significant margin.

In addition, low volatility stocks (S&P 500 Low Volatility Index -6.99%) significantly outperformed the S&P 500 (-16.10%) as market volatility caused a flight to lower beta stocks. Our bias towards low volatility stocks has aided our outperformance in the downturn.

From a market capitalization standpoint, large, mid, and small capitalization stocks were all down roughly 17% in the quarter, a trend that has not held true over longer-time frames as stocks with a larger capitalization have significantly outperformed smaller stocks over the past ten years.

US Bonds

The broad sell-off in the bond market that began in the 1st quarter continued in the 2nd quarter as investors grappled with unrelenting inflation, aggressive monetary policy and recessionary fears. During the 2nd quarter, the Federal Reserve (Fed) had two scheduled meetings in May and June in which investors were anticipating an increase in Federal Fund rates to help offset inflationary pressures. As a result of the year-over-year inflation percentage reporting at levels not seen since the 1980’s, the Fed was forced to raise rates at their meetings respectively by 50 and 75bps, respectively; much larger moves than initially expected. The 0.75 percentage point raise was a step not taken by the Fed since 1994.

Throughout the quarter, we experienced significant intra-day swings across the yield curve as investors tried to digest the constant cycle of economic data releases, news headlines and Federal Reserve members’ commentary. In mid-June, we saw the U.S. 10-year Treasury note yield hit its highest level since 2011 (3.48%), ultimately finishing the quarter at 3.02%. Bonds rallied to close the quarter after published data showed a slowdown in consumer spending, renewing fears of a recession in the near-term leading investors to believe that a weaker economy could slow the Fed’s rate rising cycle. Chairman Powell has continued to state the ultimate goal of the Fed’s hawkish monetary policy is to raise rates enough to mitigate inflation without causing a recession; many investors fear this “soft-landing” will be difficult to achieve.

Similar to the first quarter, there was no safe haven in the bond market as all sectors posted negative returns. Higher quality sectors outperformed the riskier sectors on a relative basis as high yield issuance dropped and there were persistent outflows from the asset class. On a year to date basis, U.S. government bonds and floating rate bonds are the strongest performing fixed income sectors.

As fixed income investors, we must remind ourselves again that though the increases in interest rates create further negative performance to bond holdings or short-term pain – it also creates higher savings rates and the ability to now compound interest at higher yields moving forward or longer-term gains.  We continue to stress that bonds play a critical role within client portfolios as both a diversifier and vehicle to build and compound income.

Diversifying Asset Classes

Equity diversification was beneficial as market volatility increased. Managed Futures was the only positive asset class up 5.80% in the quarter. A number of other equity asset classes including High Dividend-Paying stocks, Master Limited Partnerships, Precious Metals, REITs, and Mid Cap stocks all outperformed the S&P 500. 

Fixed income diversification was not beneficial in the quarter as investors flocked to safer government securities and high quality credits. Riskier assets classes with higher correlations to credit and equity markets such as High Yield bonds, EM Bonds and Bank Loans all underperformed the Bloomberg Intermediate Government/Credit Index. 

Asset Class Benchmark Q2

Foreign Stocks



Emerging Markets Stocks

MSCI Emerging Markets


US Mid Cap Stocks

Russell Mid-Cap


US Small Cap Stocks

Russell 2000






Bloomberg Commodity



Alerian MLP


Managed Futures

Credit Suisse Mgd Futures Liquid TR


Foreign Bonds



Emerging Market Bonds



US Inflation Protected Bonds

BbgBarc US Treasury TIPS


Floating Rate Loans

Credit Suisse Leveraged Loan


US High Yield Bonds

BbgBarc US Corp High Yield


Convertible Bonds

ICE BofAML Convertible Bonds



Like carrying an umbrella in the sunshine and sunscreen in the rain, our portfolios are constructed to protect you in all- weather scenarios. We plan to help you meet your long-term financial goals in all environments and encourage you to stay the course.

As always, should you find yourself questioning your current situation, our team is always here to help you navigate through these challenging times. Thank you.



David B. Smith, CFA

Managing Director and Chief Investment Officer

Not Insured by FDIC or Any Other Government Agency / Not Rockland Trust Guaranteed / Not Rockland Trust Deposits or Obligations / May Lose Value