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07/25/2022

MARKETS IN A MINUTE: MID-YEAR REVIEW & OUTLOOK
KARA MURPHY, CFA | 07/19/2022

There is no sugarcoating market performance in the first half of 2022. With the ongoing war in Ukraine, China’s zero-Covid policy, domestic political disputes, upcoming elections, and of course, inflation concerns, asset classes nearly across the board declined.

For many Americans, it feels as if prices are rising on everything, except for their paychecks. At the same time, the negative performance in stocks and bonds is hurting their nest eggs. It’s no wonder that consumer confidence is at a several-year low.

But there is a silver lining. Markets look forward, pricing in what investors think will be, not what they are. As such, current stock and bond prices already reflect a significant economic slowdown, if not a full-on recession. With that, stock valuations and bond yields are more attractive than they’ve been in quite some time

Turmoil like this calls for courage. Courage to remember that, though they may be painful, bear markets do end, and without warning. And when a bear market ends, a bull market ensues and assets rise.

Here are a few highlights from the second quarter:

The S&P 500 declined by 16% in Q2 alone and passed the threshold that marks a bear market.

After a very strong first quarter of the year, commodities declined on an absolute basis, though remained an outperformer relative to other asset classes. Similarly, energy stocks held up relatively well, declining just 5.2%

Consumer discretionary stocks were particularly hard hit during the quarter, with the sector dropping 26%, driven by increasing concerns around inflation and declining consumer buying power.

Q2 2022 Index Returns

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. Source: Kestra Investment Management with data from FactSet. Index proxies: Bloomberg Municipal Bond Index, Bloomberg US AGG Bond Index, S&P US TIPS, ICE BofA US High Yield, S&P 500, MSCI World ex USA, MSCI EM, Dow Jones US Select REIT, Dow Jones Global X US & Bloomberg Commodity Index. Data as of June 30, 2022.



As inflationary pressures continued to grow, the Federal Reserve hiked interest rates much more aggressively, effectively slamming on the economic brakes.

Economic indicators are flashing warning signals about the pace of growth. For instance, one leading measure of manufacturing activity declined precipitously in the last reading.

Despite strong balance sheets and labor markets, consumer confidence has been among the lowest we have seen since the global financial crisis.

The inflationary pressure faced by the U.S. economy is not unique. Both developed and emerging economies are facing the same challenges of rapidly increasing inflation, slowing growth, and central banks tapping the brakes.

With consumer prices soaring by the fastest pace in decades, will inflation ever come down? There are some signs that price increases will cool later this year.

Supply chain disruptions that had wreaked havoc earlier during the pandemic are easing. Rates for shipping containers had soared and are now falling.

Retailers are seeing inventories build, which may even lead to some price cuts.

Commodity prices, after enormous gains earlier this year, are now falling. Wheat prices are back to where they were prior to the war in Ukraine. Lumber, copper and gas have all dropped from recent highs.

Importantly, market participants believe that over the long term, inflation will come back to the Federal Reserve’s target of 2%, betting that the Fed will win the war with inflation.

5 Year Forward Inflation Expectation Rate

Forward looking estimates may not come to pass. Past performance is no guarantee of future results. Source: Kestra Investment Management, Federal Reserve Bank of St. Louis & FactSet. Data as of June 30, 2022.

Conclusion: There is a Silver Lining
So far this year, the S&P 500 has been in a bear market for about 180 days and has declined by over 20%. While a sharp recession could certainly bring new lows but already lower stock prices and solid earnings have brought equity valuations are below their 25-year average. Bond yields are at more attractive levels than we’ve seen in several years.

Bear markets may be painful to endure, but they don’t live forever. Bull markets on average have lasted almost five times longer than bear markets and they’ve provided much more upside than bear markets provide downside. Most importantly, it’s impossible to know at the time that a bear market has ended. Not being invested during that turn could mean losing out on tremendous upside. If you can maintain the courage to wade through these periods, history suggests you can get excellent returns.

Bear Markets Don't Live Forever

Forward looking estimates may not come to pass. Past performance is no guarantee of future results. Source: Kestra Investment Management, Charles Schwab & FactSet. Data as of April 04, 2022.



The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC does not offer tax or legal advice.

ABOUT THE AUTHOR

Kara Murphy, CFA
As Chief Investment Officer of Kestra Investment Management, Kara brings her extensive expertise to partner with the independent financial professionals associated with the Kestra Holdings ecosystem. Kara and her team provide hands-on support, that includes market commentary and research, guidance on portfolio construction, and a broad array of investment solutions designed to empower financial professionals to serve their clients’ wealth management needs.
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07/13/2022

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Rising interest rates have roiled stock and bond markets this year. But they’re also raising concerns about the outlook for the U.S. housing market, which has been a bright spot in the post-Covid economy. Having just sold and bought a home, I can understand individuals’ concern.

The average rate for a 30-year fixed mortgage loan, the most-common loan term, hit a 14-year high of 5.8% last week. For better or worse, housing is one of the most rate-sensitive areas of the economy. Over the last couple years, ultra-low mortgage rates have been a boon to the housing market, stoking demand and pushing median sales prices to new records.

How Much Home Prices Are Up Since the Onset of the COVID-19 Crisis

Forward looking estimates may not come to pass. Past performance is no guarantee of future results. Source: Fortune, Lance Lambert, and Realtor.com

So, where does the housing market go from here?

Higher rates mean higher monthly payments for buyers or homeowners refinancing mortgages. As the cost of buying climbs, demand typically cools, and prices soften. We’re seeing signs that demand is cooling because of sharply higher mortgage rates combined with high home prices:

• Homebuilder optimism slumped in June, as did housing sales expectations, according to the National Association of Home Builders (NAHB). Traffic of prospective buyers has declined considerably since March.
• Existing home sales fell for the third straight month in April. Sales were down 2.4% from the prior month and 5.9% from one year ago, according to the National Association of Realtors. (NAR) The median existing-home sales price increased at a slower year-over-year pace of 14.8% to $391,200.

NAHB/Wells Fargo Housing Market Index (as of June 15, 2022)


Source: Kestra Investment Management, National Association of Home Builders.

What has pushed up mortgage rates?

• The Federal Reserve doesn’t set mortgage rates, but it can influence them. The primary way the Fed does so is by increasing or decreasing the fed funds rate, which determines what rates are charged to banks for an overnight loan. Often when overnight rates are increasing, then long-term mortgage rates will also rise, but not always.
• The Fed can also influence mortgage rates by participating in the mortgage-backed securities (MBS) market. After the outbreak of Covid-19 and other crises, the Fed spent billions to buy mortgage-backed securities and other bonds to improve market functioning and increase the money supply in the economy.
• Quantitative easing, as the policy is known, helped push rates to record lows. Now, as the Fed tries to fight inflation, that process is being unwound. The Federal Reserve has shifted from buying bonds to selling them — a process, known as quantitative tightening, that could put upward pressure on rates.
• Long-term rates are also influenced by expectations of long-term economic growth, inflation and the credit risk of mortgage borrowers.

Despite today’s higher rates, the housing market still faces shortages:

• Housing demand may be waning, but existing buyers must still compete for a low supply of available homes. That’s because builders have been stymied by supply-chain problems, labor shortages, a dearth of developable land, not to mention decades of underbuilding.
• In April, the inventory of existing single-family homes on the market was equivalent to just 2.2 months of supply, according to NAR. At the then-current sales pace, it would take only about two months for inventory to be fully depleted.
• Demographic shifts should bolster demand for years to come. Millennials, now America’s largest generation, are tiptoeing into marriage and homeownership. They are reportedly the fastest-growing segment of homebuyers, accounting for 37% of buyers in 2020.

Supply of Existing Single-Family Homes for Sale (as of June 17, 2022)

Forward looking estimates may not come to pass. Past performance is no guarantee of future results. Source: Kestra Investment Management, FactSet.

With home prices at lofty levels, mortgage rates sharply higher and demand cooling, what are the chances that we’re headed for a 2008-style crash?

• The housing market certainly faces risks, from the high prices that make buying a home unaffordable for many Americans to the recent influx of institutional buyers, who may be less willing than individual homeowners to hold on to properties through thick and thin.
• But we don’t see the kind of systemic risks that led to the housing bust of 2008, such as a boom in subprime mortgages and complex financial instruments that encouraged such risky lending.
• In recent years, the bulk of new mortgages have been issued to high-quality buyers (those with credit scores exceeding 760), according to data from the New York Federal Reserve.
• Total mortgage debt is higher than it was before the 2008 crash. But Americans aren’t stretched nearly as thin when it comes to the percentage of their disposable income going to mortgage payments. In fact, mortgage payments as a percent of consumers’ disposable income is just 3.8%, near a record low and half of what it was before the 2008 crash.

Mortgage Debt Service Payments as % of Disposable Income

Source: Board of Governors of the Federal Reserve System, St. Louis Fed

To be sure, today’s higher rates are already taking some of the momentum out of what has been a frenetic housing market. But provided the economy doesn’t tip into recession and the labor market remains healthy, a soft landing seems like a more-likely scenario than a crash.

As someone who spends her days investing, it’s hard not to think about the investment implications of the house I live in. Then I turn off CNBC, sit down for dinner with my kids and husband, and remind myself that I live in a home. While my home’s price is important, the real value I get from it is time with my family.

Until next time, invest wisely and live richly.

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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra…

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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra…

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Good morning, lets make is a great one!