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Market Update - July 2022

As we reach the midpoint of 2022, what is the impact of the economic news of the first six months of the year and what can we anticipate looking forward?

After so many challenges in recent months, July has offered investors a nice summer rally. For the month of July, equity markets are positive with S&P 500 and Nasdaq up +9.1% and up +12.4% respectively. The recent rally is welcome, though we remain in bear market territory with the S&P down -13.3% and the Nasdaq down -20.8% year-to-date.

Large scale economic factors and monetary policy continue to be the dominant force in financial markets. Interest rates, inflation, and concern over the health of the economy and consumer spending are changing expectations for companies’ growth and earnings and shifting the way we think of investments.

Interest Rates and Inflation: The Fed’s Soft Pivot?

As expected, the Federal Reserve recently raised the Fed funds rate by 0.75% to a target rate range of 2.25% to 2.50%. With inflation at record highs, the committee is looking to curb prices by tightening credit and slowing demand.

Jerome Powell, Chairman of the Federal Reserve, acknowledged recent weakness in economy and consumer spending. This is a notable difference from the chairman’s previous statement in June noting a “pickup in economic activity.” Given the chairman’s remarks and the committee’s belief that current rates are “neutral,” we assume the Fed will be less aggressive in hiking rates moving forward. This “soft pivot” certainly has played a role for the recent rally in equity prices and with the Treasury market now pricing in a lower than expected 0.25%-0.50% increase since its December meeting.

We expect to see inflation stabilize, albeit at an elevated rate as underlying economic drivers such as the tight labor market, the high cost of materials costs and elevated energy prices persist. Within this economic backdrop, Parkview Capital maintains a portion of our portfolio in sectors that are resilient in slowing economic conditions. Such sectors include consumer staples, healthcare, and utilities – all considered defensive choices in the face of economic weakness. This provides steady ballast to the portfolio while market volatility remains high.

Earnings Update

The second quarter earnings season is off to a mixed start. In aggregate, of the 60 companies that have reported, earnings are down on average -11 percent from the quarter a year ago. Though sales growth has been steady, costs continue to impact business’ profitability, thus the milder than expected earnings decline. The decline in earnings, though disappointing, has been moderate when we consider both consumer sentiment and level of inflation; overall this is a positive sign. We will continue to monitor and review earnings, forward guidance and evaluate our positions as we move forward through earnings season.

Changes in Manufacturing

Disruptions in the supply chain accelerated many companies’ plans for onshoring manufacturing. Having built business models dependent on “just-in-time” inventory, manufacturing products domestically has become a priority. Semiconductors top the list of industries moving at an accelerated pace towards domestic production, with the passage of the bipartisan bill to subsidize U.S.-made semiconductor chips (the CHIPS Act). Parkview portfolios are positioned to include companies that will likely benefit from this trend.

Parkview’s Strategy and Positioning

In general, from the recent sample of earnings announcements and with the Fed’s comments, the market seems to be finding some long overdue footing. However, uncertainty remains high as economic growth slows and inflation remains elevated.

At Parkview, we have sought “ballast” in the portfolio with investments in companies in sectors that are resilient under tough economic conditions. Parkview’s objective is to invest in industries and companies that will benefit from long term growth trends. One opportunity of the market correction in the first half of the year is that stock valuations are more attractive now. In addition, other new trends are forming on which we look to capitalize.

At Parkview, our mission is to meet our clients’ financial goals with a personally crafted investment strategy and portfolio. In the face of continued high uncertainty, Parkview will continue to seek opportunities for capital growth and income for investors and manage risks in an ever-evolving economic picture.

Thank you for the trust that you place in me and Parkview. As always, I encourage you to reach out to me for more information.

With sincere regards,

David W. Malmgren, CFA

Founder and Principal

Parkview Capital

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