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Jul 08, 2022

2022 2nd Quarter

CPWA Newsletter Main

Mid-Year Recap

The first half of 2022 brought a market downturn we haven't experienced since March 2020. This time, the sell-off has been prolonged as the market digested further pandemic waves, continued supply chain disruptions, the Russian invasion of Ukraine, and domestic inflation not seen in 40 years.

As widely anticipated, the Federal Reserve began increasing interest rates by raising 25 basis points (0.25%) in March, another 50 basis points in May, and then 75 basis points on June 16. Current projections are that there will be another 75 basis point increase in July, but as the Federal Reserve continuously notes, their decisions are data-dependent. The next Fed meeting will be held July 26 & 27.

The increase in interest rates helped fuel the sell-off, driving down prices in both stocks and bonds. The S&P 500 peaked on January 3, officially closed in “bear market” status (down 20% or more) on June 13, then hit a year-to-date (YTD) low on June 16, down just over 23%. The market has since rebounded slightly, with the S&P 500 closing down 20.6% for the year on June 30. The widely-used benchmark for fixed income securities, the Barclays Global Aggregate Bond Index, was down 13.9% YTD at the mid-year mark.

Looking Ahead
The primary risks we foresee are continued heightened inflation, the likelihood that Fed policy tips the economy into a recession, and reduced corporate earnings further stifling stock valuations. Against this backdrop, we continue looking for opportunities while also managing risk. While U.S. equity valuations look more reasonable, we have shifted our model portfolios to focus on companies that are best able to sustain margins in a slowing economy and that are well capitalized and therefore won’t be significantly hurt by rising rates. We’ve also added to our international exposure, citing attractive valuations, solid earnings performance and prospects for a US dollar decline—although we keep a watchful eye on the war in Ukraine and China’s success in suppressing COVID-19 while moving away from lockdowns.

What If We Have a Recession?
A generally accepted definition of recession is a decline in GDP for two consecutive quarters. In the first quarter of 2022, we experienced negative GDP. As early as the end of this month, we will find out if the second quarter also endured negative GDP. If so, we will have met the generally accepted definition of a recession and are currently living in one. Whether or not we are currently in a recession or experience one in the near-term, we don’t expect it to be particularly long-lasting or harsh.

Is Consumer Sentiment Providing a Buy Signal?
Below is another JP Morgan chart. This one illustrates consumer sentiment over the last 50 years. The blue dots indicate the highs and lows in consumer sentiment over sentiment cycles (periods of time where sentiment was generally headed in the same direction before peak and/or trough).

JP Morgan analyzed the returns of the S&P 500 over the 12 months following each high and low in consumer sentiment. Their research shows that the average 1-year S&P 500 return after periods of sentiment peaks (when people were feeling great!) was 4.1%, while the 1-year return after sentiment troughs (when consumers were feeling terrible) was 24.9%. An inference we can make from this is that historically, when consumers were negative on the economy, financial markets, and the outlook for both, the stock market already reflected the bad news and subsequent returns were well above average.

Currently, consumer sentiment is at an all-time low. Will it go lower still? Will the stock market go lower still? We don’t have answers to these questions, but we do take comfort in the notion that historically when consumers have been excessively negative, that has been a great time to invest. And consumers are currently as negative as they’ve ever been.

Consumer Sentiment Index + Sub 12mo returns SP 500

Quarterly Reports
Your quarterly portfolio reports have been uploaded to your CPWA client portal. If you do not recall your password or need to create one then please contact Meredith.

Financial Planning
During times of market volatility, it can be particularly helpful to review your financial plan to ensure you’re still on track to achieve your goals. If you want to review or update your plan, or if you don’t yet have a financial plan and want to create one then please contact Brianna, who will make sure we have updated information in your plan and schedule a time to review with the team. Financial planning is an included service for all clients.

Roth Conversions
If you are already using a Roth conversion strategy then now may be a good time to convert, as the decline in stock prices means you can potentially convert more shares now than you could at the beginning of the year. If you are not using a Roth conversion strategy and would like to learn more then please contact us or read the synopsis below.

Roth conversions occur when investors convert some or all of their traditional IRAs to Roth IRAs. Anyone can perform a Roth conversion. Two of the primary differences between a traditional IRA and Roth IRA are:
Taxes: Roth IRAs do not allow a tax deduction during contribution (and therefore when converting assets from a traditional IRA to a Roth IRA, income taxes are due on the converted amount at your current income tax bracket). However, distributions from a Roth IRA are withdrawn tax-free
RMDs: Roth IRAs do not have required minimum distributions

Converting assets from a traditional IRA, paying current taxes, and avoiding future taxes and/or RMDs can be beneficial. If you would like to review the strategy in more depth then please contact us.

RMD Age Potentially Increasing to Age 75
On June 22, the Senate Finance Committee recently unanimously passed the Enhancing American Retirement Now (EARN) Act. Lawmakers are now trying to reconcile the legislation with the House bill, SECURE 2.0. Both bills would raise the age at which taxpayers must start taking required minimum distributions (RMDs) from their non-Roth retirement accounts from age 72 to 75. The legislation may also provide other provisions, and we will keep you updated as we watch the bill evolve and potentially pass.

Introducing Our Summer Intern
Duncan Speirs, Dan’s son, wrapped up his sophomore year at Pomona-Pitzer College and is interning at our office throughout his summer break. He majors in Economics while also running long distance on Pomona-Pitzer’s track and field team (go, Sagehens!). If you stop by the office, you may see him sitting at the front desk, spending his summer learning about investments, portfolio construction, and financial planning.

In Personal News
With summer firmly upon us, our team has a variety of outside-of-the-office summer plans. Meredith is headed to Brazil to witness two family weddings. Lyle’s parents are treating their children and grandchildren to a family vacation in North Carolina. Dan is enjoying having his son home from college and weekend trips to Palm Springs. Brianna continues working on her Creston ranch, adding to her family’s herd of cattle, and spending time with her rapidly growing daughter. Jenni is cheering her sons on in Junior Giants baseball and embarking on local weekend camping trips.


This report is provided for informational purposes only, is not an offer or solicitation to buy or sell securities, and should not be relied upon to make any investment decisions. This material is not a replacement for your statement or communications with your advisory team. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal. Please contact us at 805-457-3300 at your earliest convenience with any questions regarding this report. Copyright © 2021 Cerro Pacific Wealth Advisors, All rights reserved.