I hope you are doing well and enjoying your summer. With Q2 2023 in the books, below is an overview of the markets, the economy, and other key themes that dominated the last three months. 

Monthly Themes

Entering the second half of the year, here is a recap of monthly themes in Q2: 

  • Major U.S. stock indexes traded lower in April as markets braced for additional interest rate hikes; overall prices consolidated in then-recent monthly ranges. 
  • May saw technology break out of recent trading ranges, with the Nasdaq surging. 
  • Then there was June, when the rally started to broaden, featuring a breakout by the broad-based stock index, the S&P 500. 
S&P 500: Make It Three Consecutive Positive Quarters 

Let’s make it three for the S&P! The second quarter of 2023 was the third consecutive positive quarter for the S&P 500 and the Dow Jones Industrial Average. The Nasdaq 100 was the biggest gainer of the three major indexes in the second quarter, with Artificial Intelligence stocks and large-cap tech fueling gains. 

For the second quarter of 2023, the S&P 500 increased by 8.30%, the Nasdaq 100 rose by a whopping 15.16%, and the Dow Jones Industrial Average saw an uptick of 3.41%. 


Investors shook off the banking turmoil that was front and center in the first quarter.  

Federal Reserve-induced recession is still a possibility, as interest rates remain elevated, and tightening credit conditions are making their way through the markets. However, that did not come to pass in the second quarter, as major U.S. stock indexes traded positively.  


Inflation metrics continued to decline in the second quarter, with the last Consumer Price Index data showing monthly consumer pricing declining in May from April levels. 

Year-over-year, inflation slowed to a 4.0% rise. In comparison, the year-over-year metric just a few months ago was 6.0%. That’s an impressive decline. We expect CPI to continue to fall to 3.2% over the next couple of months due to higher monthly readings from 2022 that will fall off the year-over-year readings.  

Core CPI (which removes food and energy) remains firm, potentially backing the Fed’s case for additional rate hikes. U.S. equities loved seeing headline inflation metrics tick lower throughout the second quarter, however. 

Labor Market

Strength persisted in labor markets throughout the second quarter, with solid payroll gains (253,000 in April and 339,000 in May), both numbers beating analyst consensus expectations. This is an indication of newly created jobs added that didn’t exist prior, a signal of economic strength.  

In April, the unemployment rate tied for the lowest level since 1969, at 3.4% vs. 3.6% estimates. For May, the unemployment rate rose to 3.7%, higher than the estimate of 3.5%. Perhaps this was a factor in the Fed not raising rates in June. 

As inflation readings decline, it is natural to expect some slowing in the labor market, according to conventional wisdom. As of the second quarter, the labor markets remain steady overall. America’s labor shortage is real. 

Quarterly Federal Reserve (Fed) Actions 

The second quarter featured a 25-basis-point hike in May and no hike at the June meeting, with the Fed taking a breather after ten consecutive rate hikes.  

The third quarter brings two Fed meetings: July 26th and September 30th. The Fed has indicated two more hikes for 2023, and many analysts seem to agree. The July meeting may bring one of those hikes. 

Putting Q2 Together 

Active participants are currently debating whether the market is getting ahead of itself, given some of the macroeconomic headwinds. But these same folks more than likely missed this recent stock market rally. This is a big reason to be a long-term investor: timing the market is very difficult, and many get left behind.  

Remaining focused on the long term allows an investor to avoid getting caught up in quickly changing narratives that could trigger emotional decisions.  

With that said, if second-quarter market developments are on your mind, or if there is anything else I can help with, please do not hesitate to reach out

Take Care,

Andrew Fairman Signature

Andrew Fairman, CFA, CFP®

Chief Investment Officer

It was a remarkable Q1 for 2023, and many questions now exist about the financial markets and the economy at large. 

With that in mind, below is a summary of some of the key developments to keep in mind as the second quarter begins in earnest. 


Some cracks in the economy became evident during the first quarter, with banking system uncertainty in the spotlight. The banking turmoil towards the end of the quarter rightfully rattled investors and sent volatility soaring. 

However, the market volatility was short-lived, as the first quarter concluded with buyers emerging in major U.S. stock indexes.

S&P 500: Two Consecutive Positive Quarters

The first quarter of 2023 was the second consecutive positive quarter for the S&P 500 and the Dow Jones Industrial Average. The Nasdaq 100 had the biggest gain of the three major indexes after experiencing a slightly lower fourth quarter of 2022.

Overall, during the first quarter of 2023, the S&P 500 increased by 7.03%, the Nasdaq 100 rose by a mammoth 20.49%, and the Dow Jones Industrial Average was marginally higher, by 0.38%.

Labor Market

In the first quarter, strength continued for the labor market, with solid payroll gains of 311,000 in February & 517,000 in January. The unemployment rate did edge higher in February (from 3.4% to 3.6%), but the labor force participation rate was little changed at 62.5 % in February.

U.S. Federal Reserve Governor Christopher Waller said in late March that inflation could decrease without harming the labor market.


The quarter’s last Consumer Price Index (CPI) data release showed consumer pricing declining in February from January levels. However, prices remained elevated. Core CPI (which removes volatile food and energy) remains firmpotentially firmer than the Federal Reserve would like to see. 

The inflation battle has resulted in the fastest pace of Federal Reserve rate hikes in decades.

Quarterly Fed Decisions 

The first quarter featured one Fed meeting in March, resulting in a 25-basis-point hike. The hike was largely expected, although some participants wanted to see a pause in the wake of the banking turmoil. The second quarter features two Fed meetings on May 3rd and June 14th, with continued rate hikes possible. 

Putting Q1 Together

Starting out 2023, the Nasdaq had its best January since 2001, a welcome way to start the year and quarter.

Major U.S. stock indexes traded lower in February as markets braced for additional interest rate hikes and economic headwinds were in focus. And March had it all: banking turmoil, a spike in volatility, and ultimately, a rally in the major U.S. stock indexes.

At the close of the first quarter, market expectations seemingly shifted towards a more gentle Fed for the remainder of 2023, with one more rate hike being the consensus. The Fed has also forecasted one more rate hike.

Active market participants are currently debating whether the market is getting ahead of itself, with some expecting rate cuts later in the year, even as the Fed suggests that will not be the case.

Amid all of this first-quarter speculation and turmoil, remaining focused on the long term became all the more important. A long-term focus prevents investors from getting caught up in quickly changing narratives that could trigger emotional decisions.  


With that said, if you have questions about first-quarter developments or if there is anything we can help with, please do not hesitate to reach out


Andrew Fairman Signature

I believe it goes without saying that putting 2022 in the rear-view mirror could not have come quick enough. Difficulty in financial markets, the economy as well as geopolitical tensions have weighed heavy on the minds of many over the last 12 months. 

The S&P 500 Index was down over 18% and bonds, which typically do well when equities decline, were also down over 12% for the year due mostly to the Federal Reserve hiking interest rates to combat inflation. There were few places to hide from declining asset prices and rising consumer costs in 2022. 

Fortunately, inflation as measured by the headline Consumer Price Index (CPI), which peaked at close to 9% year-over-year in June of 2022, has been in a downtrend and finished the year at 6.4%. 

Further, these year-over-year CPI figures are somewhat misleading as they still contain the readings for the high inflation months of early last year. This is what is referred to as “base effects” and, as the high inflation months fall off the year-over-year readings, you should expect to see the headline CPI data begin to moderate downward toward the Federal Reserve’s target of around 2%. It should be noted though, that we may not reach the Fed’s desired target until 2024 or later. 

Looking forward to 2023, I am somewhat optimistic that stocks and bonds are in a position to recoup some of the losses from 2022. I say this in spite of the fact that I believe we will likely have a recession here in the US in 2023.  

First, with the yield on the Bloomberg Barclays US Aggregate Bond Index (the Agg) currently over 4.6% and the Federal Reserve presumably closer to the end of hiking rates, we should be able to generate some decent income on bonds moving forward. As a reference, the yield on the Agg index at the start of last year was 1.75%. Additionally, investors typically move to the relative safety of bonds relative to stocks when the economy softens. 

As far as stocks in 2023, we’re off to a decent start, up over 6% year-to-date as of January 30th. While this is welcome news for investors, I believe we will experience some choppiness in the markets for the near-term. 

As mentioned previously, inflation appears headed in the right direction and the Fed is closer to the end of rate hikes after raising interest rates a total of 7 times in 2022, but if these don’t continue in the right direction we could see some more volatility and drawdowns in the stock market. 

The Fed is also in a precarious position in that they are trying to tame inflation by slowing the economy, but they also run the risk of tightening economic conditions too much and causing a painful recession. As of now, the general market consensus is for a short and shallow recession sometime in 2023, but there is still a risk that if conditions deteriorate faster than the Fed anticipates, we could see something more severe than that consensus scenario. 

The good news for stocks though is that they typically bottom and begin to rise before the end of a recession. As forward-looking mechanisms, markets fall in advance of deteriorating economic conditions and begin to rebound once the extent of the economic damage is done. This is also the reason why, historically, the best time(s) to invest have been when the economy feels the worst in real time. 

With that said, we don’t attempt to time these inflection points in markets when investing on behalf of our clients. Attempting to do so has proven to be statistically a near impossibility with the risk of hurting investment returns by doing so. 

Instead, we stick to our time-tested approach of thoughtfully allocating and diversifying into asset classes and investments with a history of appreciation and a focus on the long-term.  We believe this consistent approach gives our advisors the ability to confidently guide our clients to and through retirement. 

Here’s to hoping 2023 is a prosperous one!

We hear you. You, like most investors today, are very concerned about market volatility and falling account values. Should I be selling to protect my retirement,  you may ask?

You are not alone. Turbulent markets and geopolitical uncertainty can be stressful, and we can’t exactly predict when all this volatility will begin to moderate.

What I can say with some certainty is that it won’t last forever and that markets will begin to recover before the economy is flashing “all clear.” This is because stock markets tend to be “leading indicators” and move directionally anywhere between 6 to 12 months ahead of the overall economy.

The most recent example of this phenomenon was in early 2020, when, as the world economy was shutting down due to Covid-19, the S&P 500 began a bull run that erased the 34% year-to-date decline and even finished the year positive almost 20%. Markets do funny things.

Below is a chart from J.P. Morgan that I’ve shared before, but it is worth showing again:

Declines in the market are a part of long-term investing and not an indication that markets are broken. The red dots indicate the intra-year percent decline going back to 1980 and the gray bars indicate where the calendar year ended.

Here is another graphic from First Trust that shows the historical length of bull and bear markets:

Going back to 1942, there have been 15 bear markets lasting an average of 11.1 months. We are currently heading into month 9 of the current decline and could be at 11 months by Christmas.

Could it last another 11 months? Sure. Could we have already hit the bottom given the first few positive days of trading in October? Sure.

But here’s the thing about investing for a time horizon longer than 11 months. You don’t need to time these bear markets to be successful at investing for the long term. Bull markets have historically lasted 4 times as long as the typical bear market.

So, if you’re considering selling today and investing in something “safer,” the odds are against you that you will perform better than a diversified portfolio over the intermediate to long term.

And if you say to yourself that I will get back into the market when the economy feels like it’s on better footing, the odds are that the market has already anticipated that well in advance.

In my opinion there is a bright silver lining to all that we’ve been through in the markets in 2022.

First, while bonds have taken it on the chin this year because of higher interest rates, the yields that bonds pay are now higher as a result. The best predictor of future bond returns is the starting yield so our outlook for bond returns hasn’t been this bright in over a decade.

And for stocks, we can’t change what has happened year-to-date but right now is unequivocally a better time to be buying and owning stocks than any other time in 2022. As stock prices go down, future expected returns go up. Are we at the bottom? Maybe so or maybe not. But are the chances good that we will be happy that we were invested in the markets 3, 5, or 10 years down the road? I like those odds.

Looking for more commentary about 2022 markets? Check out these other posts:

My goal is to give you a brief mid-year market commentary for 2022 and provide some insight into what I’ll be watching and following over the next few months. 

Frankly, the first half of 2022 has not been enjoyable if you’re an investor. The S&P 500 (a broad measure of US stocks) is lower by more than 20% and the BloombergBarclays US Aggregate Bond Index (a measure of investment grade bonds) is lower by more than 12%. 

The fact that both indexes are down so much and at the same time is extremely uncommon. We all know that financial assets are subject to downside risks, but that certainly doesn’t make times like these any easier. It’s felt in our account statements and the prices we pay at the pump or at grocery store.

On the minds of most investors these days is inflation and whether it is here to stay. Investors were caught off-guard earlier this month when the CPI (consumer price index) data for the month of May came in higher than expected. Consumer prices increased 1% in May vs. 0.3% in April and above economists’ estimates. 

I would highly encourage you to take these single data points with a grain of salt and instead follow the longer-term trends as a better indicator of direction. Temporary factors and a relatively small sample size can create a lot of statistical noise which influences the output of the data. 

The crystal ball I ordered is still on a container ship somewhere in the Pacific, but I’m confident inflation won’t be at these levels forever. The bad news is that it won’t be an overnight process to normalize and it’s going to take some natural economic healing and Fed action to make this happen. 

As you may know, the Federal Reserve opted to raise the Fed Funds Rate by 75 basis points or 0.75% at last week’s meeting. This action is meant to slow down economic activity with the intention of cooling inflation. The main risk to this action is that they could unintentionally throw our economy into a recession if it cools too much. It is my opinion that they are walking a fine line and only time will tell if they are successful at bringing down inflation while avoiding a recession. 

As investors, we don’t have control over the economy or Fed policy, but times like these do give us some opportunities. For instance, in taxable accounts we are actively looking to capture capital losses for which clients can use to offset a portion of income as well as carry-forward these losses to offset future capital gains. This opportunity allows us to improve after-tax returns when markets ultimately improve. 

Additionally, we are looking to rebalance portfolios that have drifted from their target investment weights. I view this operation as a risk management technique that ultimately allows us to buy low and sell high and takes the emotion out of investment decision making. Rebalancing also has been proven to lower portfolio volatility and adding to return relative to a “buy and hold” strategy. 

Which brings up another opportunity these types of markets create. Now is a great time to, if you haven’t already, have a discussion with your financial advisor to revisit your goals and priorities. As humans, volatile markets have the ability to trigger a negative emotional response, but working with an advisor to help you get through the rough times and keep the focus on the long-term can be invaluable.

With the S&P 500 Index down close to 16% and the US Aggregate Bond Index down almost 10% year-to-date, there has been nowhere to hide in markets. Frankly, the start to the year has been awful any way you slice it. 

Whether it stems from inflation, Fed policy, the dire situation in Ukraine, the strong US Dollar or declining US economic growth, there’s plenty of uncertainty out there at the moment. We acknowledge these are trying times. 

But it is moments like these that separate successful long-term investors from the rest. We believe this is when our value as advisors truly makes the most difference – helping our clients navigate rough waters. 

Staying the course and sticking to a financial plan in times like these is difficult. We all know markets don’t always go up but when corrections occur it just doesn’t sit right. 

Our natural instinct as human beings is to take action when we sense danger. Unfortunately, this instinct leads us to wanting to make emotional decisions about our investments at the most inopportune times. Even if doing nothing at all is the best option. 

As studies have shown, investors who try to get in and out of markets at the “right time” have consistently underperformed investors that stay invested. 

JPMorgan Asset Management reports that, from 2002 to 2021, based on research from Dalbar, Inc, the average investor had an average annual return of 3.6%. While a fully invested portfolio consisting of 60% stocks and 40% bonds returned 7.4% annually. 

In other words, the average investor does not have a great track record of timing when to get in and out of the market.

As further proof that it is difficult to know when to get in or out, we only have to look back a couple of years. The S&P 500 bottomed on March 23rd, 2020, about the time the US and global economies essentially closed their doors for business due to Covid. The S&P 500 was down over 30% from its all-time high a month earlier. Things looked bleak. 

But given the benefit of hindsight, we now know March 23rd, 2020 was the best day to put money into the stock market during the pandemic. It was, in fact, when things looked the worst and not when things were starting to feel better that produced the best future returns. 

Here is the good news though. I know a lot of individuals and families who were fully invested on March 23rd, 2020. I know these individuals and families because they are clients of SBC Wealth Management, and they rode the bull market through the end of 2020 and again through 2021. Not because they knew the market was going to do well or felt good about the economy, but because they were sticking to a plan and had stayed invested through the good times and the bad. 

So here we are again. Bad times in the markets have returned. We don’t have control over the current events causing uncertainty and we don’t know what the markets will do tomorrow. 

We do, however, have control over the investment decisions we make and the plans that were created with these times in mind. 

Is now the time to abandon ship? I don’t believe so.

With all that said, if you haven’t already, now could be a great time to revisit your financial plan with your SBC advisor. As always, we are determined and prepared to help you and your family through these rough waters.


The information provided in this post is being provided for educational and informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  Those seeking information regarding their individual financial needs should consult a financial professional.  Opinions expressed are current as of the day of posting but are subject to change without notice based upon changing market, economic, political, or social conditions.  All information is from sources deemed to be reliable, but no warranty is made as to its accuracy or completeness.  SBC, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material.  Past performance is no guarantee of future results and any opinions presented can not be viewed as an indicator of future performance.  Investing involves risk, including loss of principal.   

My goal is to give you a brief quarterly market commentary for 1Q22 and provide some insight into what I’ll be watching and following over the next few months. 

It goes without saying that the first few months of 2022 have been volatile and concerning. The vast majority of people all over the world have expressed outrage with regard to the Russian invasion into Ukraine and rightfully so. It is a glaring reminder that, despite how far our civilization has come, there are still madmen that are determined to set us back. 

YTD Summary

Taking a quick look at broad markets year-to-date, the S&P 500 finished the 1st quarter only down about -5% after being off close to -13% at the beginning of March. To give some perspective, this is the first negative quarter for the S&P 500 since the start of the pandemic. The Bloomberg Barclays U.S. Aggregate Bond Index, a broad measure of bond performance, was down almost -6% as a result of interest rates rising during the quarter. 


A topic that has also garnered significant attention lately has been inflation. The most recent Consumer Price Index (CPI) figures from the Bureau of Labor Statistics (BLS) for February were a 7.9% year-over-year increase in the prices people pay for everything from gasoline and medical care to food and transportation. Not surprisingly, the rise in prices at the pump contributed to almost a third of that increase. Uncertainty about supply and demand stemming from the Ukraine/Russian conflict is the primary culprit. 

Federal Funds Rate

The strong employment situation in the U.S. along with stubborn inflation have caused the Federal Reserve to take action and raise the Federal Funds rate from 0% to 0.25% at their most recent meeting. This is the first time the Federal Funds rate has gone above 0% since the start of the pandemic.

Additionally, the Fed has indicated a likelihood to raise rates 6 additional times in 2022. Making it more costly to borrow should have the effect of cooling an overheating economy and bringing inflation down to a more reasonable level. The impact to markets of the Fed indicating that they would raise rates has caused bond prices to fall in the 1st quarter of 2022. As a reminder, bond prices fall when interest rates go up. It will be interesting to see if the Fed can engineer a “soft landing” without sending the U.S. economy into a recession. 

Corporate Earnings

When looking at the health of individual companies though, we are seeing strength in their ability to continue to grow earnings. For the 4th quarter of 2021, 75% of companies beat their own expectations with regard to earnings and 69% beat estimates of revenue growth. Bear in mind that this occurred while we were battling Omicron, high inflation, and a fragmented supply chain. Wall Street analysts estimate that corporate earnings will continue to be healthy for the rest of the year at an 8% to 9% growth rate. I believe the resilience of U.S. corporations has been somewhat overlooked in the start to 2022 and should be supportive of stock prices moving forward. 


Interestingly, returns for stocks in past periods of inflation have been positive more often than not. This is likely due to the fact that companies are able to pass along higher costs to the consumer in the form of higher prices. Fortunately, the average U.S. consumer is in a strong place at the moment with very low unemployment, retail spending has continued to grow quarter over quarter, and wages have been increasing above their long-term averages. Add to that the 7.0% annualized GDP growth from the 4th quarter and you have the underpinnings of a strong economy. I have a feeling that the implications would be much different if the U.S. consumer and economy weren’t in such a strong position. 

Looking Ahead

Looking forward, there are many events happening here at home and abroad that are causing a great deal of uncertainty. A peaceful resolution in Ukraine would be ideal but doesn’t seem likely at this stage. Getting some clarity on its eventual conclusion and not pulling more players into the fight would be a relative positive for markets. Oil and commodity markets should expect continued volatility the longer the dispute goes on.

The Federal Reserve and the success of its mission to combat inflation will only be measured one data point at a time. The Chairman of the Federal Reserve, Jerome Powell, has been clear in his communication that he and the other Fed governors are prepared to take action to fight inflation and that a hike in the Fed Funds Rate of an additional 50 basis point (0.5%) at their next meeting is within the realm of possibility. We will get the next CPI reading on April 12th for the month of March, and it will be the last reading before the Fed convenes again at the end of April. 

Earnings announcements for the 1st quarter of ‘22 will begin in a little over two weeks and I will be looking to see if the positive momentum from the last quarter has been sustained as well as listening to the communication from executives on the impact inflation and supply chains have had on financial performance. Any weakness here could put further pressure on stock prices. 

Big Picture

Lastly, I’d like to finish on a big picture note. As I’ve said before and will say again, markets find a way to climb a wall of worry – and there’s a lot to be worried about out there at the moment. Our investment approach at SBC has always been about taking the guesswork out of trying to correctly predict short-run events and their outcomes by sticking to a long-term, rules-based philosophy. By taking this stance, it allows us and our clients to take advantage of the market’s ability to climb that wall over time. 

Be sure to reach out to one of our advisors with any questions you may have, and we’ll be happy to get them answered for you. 

As Always, Be Well!

Andrew Fairman Signature

We woke this morning to the news of a full-scale attack by Russia into Ukraine with airstrikes being carried out on the capital city of Kyiv. While this doesn’t come as a complete surprise given recent posturing, it is unfortunate, nonetheless. 

As a result, the S&P 500 started the day by giving back around 2.5% while European markets are currently trading lower by over 4%. On the other hand, domestic bond markets are benefitting from the flight to safety of the U.S. Dollar and U.S. Treasuries with the 10-year US Treasury note yield declining over 5% (bond prices rise when yields fall).  

A military strategist I am not, so I won’t use this piece to speculate about the eventual outcome of this territorial dispute. What I do know is how this may (or may not) effect markets and investment portfolios. First and foremost, the best thing we can do right now is not make hasty investment decisions that have an impact on your long-term financial plan. 

In previous commentaries I have illustrated that some of the best days in the stock market occur around the same time as the worst days. The implication here is that if you take risk (stocks) off the table or sell everything and go to cash for short-term peace of mind, you are likely to hurt your long-term returns. 

Here is a chart from JPMorgan Asset Management’s publication, Guide to the Markets, to demonstrate:



It goes without saying that this is easier said than done. One of my favorite financial writers, Ben Carlson, recently wrote that “When markets are going down, human nature takes the wheel while fundamentals are tied up in the trunk.” I think that illustrates our basic human instinct to react in the face of perceived danger.

Also, if recent history is any indicator, we should take pause before making investment decisions based on the headlines of the day. In early 2020, if you were told that a global pandemic and associated economic shut down was going to happen, my guess is that the most, if not all, people would have said that stocks around the world would be crushed. The S&P 500 finished the year positive 18.4%. 

I understand it’s easy to get caught up in current events and I, in no way want to minimize what is going on in eastern Europe at the moment (in addition to rising interest rates, inflation and supply chain issues), but I am confident in our approach to investing for our client’s future. Setbacks and sell-offs are a function of the markets and not a flaw of the markets. 

A time-tested, diversified approach to investing has continually climbed a wall of worry and, while I can’t predict the future, I am confident that this approach will continue to serve us well in the future. Rest assured that we are doing all we can in the interim to make sure we weather these periods of volatility. 

Please don’t hesitate to reach out to me or your advisor if you have any questions. 

Be Well!

As of Friday, July 16th, the S&P 500 Index, with dividends reinvested, has returned a robust 16.12% to start the year. This comes on the heels of a 17.4% total return for the index for all of 2020. Interestingly, if you measure the index’s performance from last year’s market bottom on March 23rd through the end July 16th, the index is up 97.61%. In other words, the S&P 500 has nearly doubled in a little more than a year. Who would have guessed that would be the case as we were on the brink last March? 

Bonds on the other hand, as measured by the Bloomberg Barclays US Aggregate Bond Index, have not fared as well in 2021. As of July 16th, the index was down -0.94% year-to-date. Although, this is much improved from the end of the 1st quarter of 2021 when the index was down -3.39% for the year. Since 1980, this index has only finished negative 3 times for a calendar year (1994, 1999 and 2013).1  

What has powered these moves? 

For stocks, it has been the hope and eventual realization of the re-opening of our economy.  As vaccinations rose and cases, especially deaths, plummeted, people decided it was time to get out of the house and start doing normal activities again. Air travel, hotel stays, gasoline usage is all higher than one year ago. Corporate earnings have rebounded in a way that no one expected with expectations for full year 2021 earnings that are 20% above those from calendar year 2019. 

For core bonds, whose prices move inversely to interest rates, it has been an up and down year thus far. We started the year with a yield on the 10-year US treasury note at 0.92% and it rose all the way to 1.75% on March 31st – a negative for bond prices. Since April 1st, the 10-year yield has slowly fallen back below 1.2% as of July 19th – a positive for bond prices but not enough to recover the losses from the first quarter. 

What could impact the rest of the year?

Looking forward, we have identified a couple topics we believe has the potential to impact returns through the end of the year and beyond. Those are the trajectory of inflation and continued stimulus from the Federal Reserve and Congress. 

Inflation has been leading the headlines lately and for good reason. The year over year increase in June for the Consumer Price Index (CPI), which is the most common measure of inflation in the U.S., came in at 5.4%.2 This is the largest 12-month increase since August 2007-2008. While this sounds frightening and harkens many back to the runaway inflation of the 1970’s, a look under the hood at the drivers of recent inflation reveal some interesting details which lead us to believe that headline inflation figures will likely moderate over the next 6-12 months. 

The first of these details comes from the course we have been on since this time last year. Prices for gasoline, hotel rooms and airfares were in the cellar a year ago, but as we have steadily reopened as a country, these prices have naturally come back. This has been referred to as “base effects” by commentators. In other words, these prices started from an unnaturally low base during the pandemic only to rebound back to more normal prices a year later. For reference, gasoline is up 45.1%, airline fares up 24.6% and hotel and motel room rates are up 16.9% over the last year. We expect these forces to moderate as the economy normalizes.2 

The second issue comes from supply shortages that have come about because of the massive supply chain disruptions that have occurred over the last 12 months. The prime example of this phenomenon has played out in the used vehicle market. A shortage of microchips used in manufacturing new vehicles has caused scarcity in the availability of these cars and trucks. As a result, the overall demand for vehicles and limited supply of vehicles has caused prices to rise. Used car and truck prices increased 10.5% in June alone and accounted for more than one third of the monthly CPI increase.2 Like the impact from “base effects,” we expect this trend to moderate as the supply chain for vehicles comes back online.

When we look at other important components of CPI such as food (+2.4% year over year) and rent of primary residence (+1.9% year over year), we are encouraged that the situation is not as dire as it may seem in the headlines. 

Of course, there are risks though. Right now, the market is pricing in an annual rate of inflation of about 2.41% over the next 5 years which seems reasonable.3 But if some of these short-term price increases last longer than expected and higher prices are eventually passed on to consumers, it could stifle spending. If this occurs, economic growth could potentially stall which would increase the chances of recession. 

Monetary policy, or more simply Federal Reserve policy, with the monthly purchase of $120 billion of Treasury bonds and mortgage-backed securities (MBS) that began at the start of the pandemic, has flooded the market with cash. This has helped keep both stock markets afloat and short-term interest rates near zero. But as the market heats up, we expect the Fed to begin slowing or “tapering” their purchases of Treasuries and MBS to prevent the economy from potentially overheating. We do not expect the Fed to begin tapering in 2021 but we do expect conversations and comments from the Fed around the timing of tapering to begin in the latter half of the year. When and whether they act will all come down to the rate of GDP growth, the rate of inflation and the health of the labor market as we close out 2021.

Fiscal policy, on the other hand, has the potential to be a wild card. As we sit here today, there is a potentially $1 trillion infrastructure spending package that is nearing bipartisan agreement. If passed, this infrastructure package would possibly supplement a much larger, $3.5 trillion spending and tax credit plan with only Democratic party support. With the larger bill focusing on “antipoverty, education and climate” comes the likelihood of higher corporate taxes and capital gains taxes for those making over $400,000 per year to off-set the massive spending.  Negotiations have been going on for months and it may be months more before anything gets settled, if at all. 

The primary concern, if both bills pass, could likely be that the additional government spending, on top of an already churning economy, would have the ability to stoke already simmering inflation by introducing more cash into the hands of consumers.  Additionally, a hike in corporate taxes would have an almost immediate negative impact on the value of most corporations and their stock prices. 

There is also the possibility that none of these bills get passed or, at least not until sometime next year. I would say that the market is currently pricing a high likelihood of these bills or some similar variation passing through Congress, but if those expectations change and uncertainty creeps into the market it could bring with it higher volatility in stock and bond prices.    

Taking all of this into account, there have always been reasons to be cautious about having your money in the market or investing new money. But markets, over the long term, have always climbed that wall of worry. Consider this, since 1926 investing in the S&P 500 for only one day at any given time you would have had a positive return 56% of the time – a little better odds than a coin flip. Investing for any one year on the other hand you would have had a positive return 75% of the time. For any 5-year period you would have positive returns 88% of the time, 95% of the time over any 10-year period and 100% of all 20-year periods. 

But getting there is not easy. Within any given year you would have, on average, experienced 3 declines of more than 5% and at least one decline of 10% or more. 

With these facts in mind, we at SBC construct client investment portfolios to be prepared for short-term disruptions but remain appropriately positioned to take advantage of the long-term probabilities.  


  1. Source: Morningstar Direct 
  2. https://www.bls.gov/news.release/cpi.t07.htm
  3. https://fred.stlouisfed.org/series/T5YIE