Retirement Plan Update, Q2 2022

Market Recap:

The second quarter of 2022 ended in a technical bear market, with the stock market down over 20%.  Continued inflationary pressure prompted the Federal Reserve to raise rates even more aggressively than predicted, which drove prices lower for both stocks and bonds.  Inflation is driven by an imbalance of supply and demand and while the Fed can help reduce demand, they can’t do much to help bolster supply.  Supply is a global challenge and the ongoing war in Ukraine along with the zero covid tolerance policy in China both continue to cause supply issues.  

Defensive bonds have also gotten hit hard this year with rising interest rates and inflation.  Typically, when stocks move lower in correction, bonds hold or rise, providing balance or protection.  In that light, there has really been no place to hide from market volatility.  As we ended the second quarter, momentum is finally beginning to build in the bond market as treasuries are showing more consistent strength.  Yield curves have flattened and the spread between rates on high yield bonds and treasuries has increased dramatically.  That’s economic speak to say – capital is starting to move to safer assets in anticipation of rising risk.  This creates more opportunity in bonds and should begin to mitigate risk in diversified portfolios.

What is a Recession? 

The Fed has a poor track record of combatting inflation by raising rates without causing a major slowdown in the economy.  But what is a recession?  The National Bureau of Economic Research (NBER) definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months.  The most common definition of recession used in the media is a 'technical recession' in which there have been two consecutive quarters of negative growth in real Gross Domestic Product.

Some data suggests recession risk is rising.  Persistent inflation, rising interest rates and supply chain issues are creating an economic environment that makes recession more likely within the next year.  Labor markets remain strong, though, with demand for workers still exceeding supply of workers.  It will be interesting to see what happens to corporate earnings for second quarter as those results begin to be reported this month.  

So, you may be asking, what do I do now?  By staying focused on your long-term retirement goals, you may reduce the peaks and valleys of investing.  First, make sure you have a diversified portfolio that reflects your risk tolerance and time horizon to retirement.  If your allocation reflects those factors, be patient and remember that you’re investing for the long term.  For active participants, volatility often creates an opportunity to buy more shares while prices are lower – so many can improve long term savings with their contributions each pay period.

If you have any questions don’t hesitate to reach out to your plan’s advisor.