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Portfolio Manager Commentary

 

Q2 2022 Income and Growth Comments

by Robert Cagliola, CFA and Robert Hahn, CFA, on July 22, 2022

The second quarter was marked by exceptional weakness as the S&P 500® declined by 16.4% with very few places to hide. For the first half of the year, the index is down 20.6% reaching bear market status for the second time in just a little over two years. Market weakness was driven by Fed tightening and raising the Fed Funds rate to cool inflation which has been at multi-decade highs. Inflation as measured by the Consumer Price Index (CPI) rose 8.6% from May 2021 to May 2022, the largest increase since December 1981. The Fed responded by increasing the Fed Funds rate by 0.75% to 1.50% -1.75%, the largest rate hike since 1994. In addition, beginning in June, the Fed started to let $47.5B of securities roll off the balance sheet per month, ramping up to $95B per month In September. Investors are concerned that the Fed’s tightening and rate hikes, though necessary to combat inflation, could lead to a recession. The Atlanta Fed’s GDPNow model is predicting a 2.1% decline in GDP during Q2, suggesting that we may already be in a recession. As a result of the concerns about inflation and the Fed’s ability to control it while avoiding a recession, there were very few places to hide as both stock and bonds declined for two consecutive quarters for the first time in four decades with only one sector in the S&P 500 (Energy) in positive territory thru the first half. One point of optimism may be that the yield on 10-yr treasuries closed the quarter at 3.02% after reaching a 3.5% in June. Commodities also declined from recent highs, with oil closing at $105.97 off its 2022 highs of $130.50 and copper closing down 1.3% in Q2. While commodity declines and the recent decline in 10-yr treasury rates suggest that inflation possibly peaked last month, the declines could also suggest that future demand may be negatively impacted by a recession. Stock performance in the second half will likely depend on a possible moderation in inflation and in the Fed’s pace of rate hikes and quantitative tightening.

Portfolio Equity Positioning:

During the quarter, we maintained our defensive posture further reducing our Consumer Discretionary sector exposure while buying Lockheed Martin which has a solid dividend and is less dependent on the macroeconomic environment. We remain overweight in Consumer Staples and Healthcare relative to the S&P 500® Index.

Outlook:

In the second half, we expect the market will continue to experience elevated volatility in both directions until investors gain more clarity on inflation and the aggressiveness of Fed policy. There is potential for a market rebound later this year if inflation moderates and the Fed becomes more measured in its future rate increases and quantitative tightening. We expect companies to be more conservative in their guidance during the upcoming earnings calls and earnings estimates will likely decline as a result. Equities, particularly dividend payers, should continue to be a good hedge against inflation.

 

Important Disclosures

This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Opinions are subject to change without notice.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Connors Investor Services, Inc. [“Connors]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Connors. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Connors account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Connors accounts; and, (3) a description of each comparative benchmark/index is available upon request.

Topics:Covered Call CommentsIncome and Growth Comments

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