May 2022 Market Update
May 31, 2022 - Whether politics, pandemic, surging inflation or rising energy prices, divisiveness and uncertainty abound in our country today. You may be wondering how current events and future outcomes will affect your investments. At HighGround, we wish to give you peace of mind by stewarding well what you have entrusted to us and by resourcing you with the information and guidance you need to advance your mission.
- The U.S. economy slowed during the first quarter, and in response to the Russia-Ukraine war's impact on global economic growth, the International Monetary Fund (IMF) lowered their 2022 global GDP growth forecast to 3.6%, a drop of 0.8% from its January 2022 forecast. Furthermore, due to its zero-COVID policy, China’s economic growth has come to a standstill, which will put additional downward pressure on the global economy.
- The U.S. unemployment rate fell to 3.6% in March, quickly approaching the February 2020 pre-pandemic rate of 3.5%, a 50-year low. With the addition of 431,000 jobs, March was the 11th consecutive month of job gains over 400,000, the longest stretch of growth of this magnitude since 1939.
- U.S. inflation hit a forty-year high in March, surging 8.5% year over year, driven by higher prices for energy, food and housing alongside prolonged supply constraints
- The S&P 500 was off 13% at the end of April. In contrast, HighGround's Capstone Endowment Fund was down only 6%, demonstrating the advantages of strong diversification during short-term market disruptions.
When will the global equity market environment improve?
Equity markets will likely stabilize as inflation expectations peak, absent a recession. The U.S. Federal Reserve has begun raising interest rates to lower aggregate demand and alleviate inflation pressures. It is unclear, though, whether the Fed will be successful in reaching its objective without creating additional market volatility.
Opportunely, several contributors to inflation are showing signs of easing, as demand for durable goods normalizes from elevated levels. On the other hand, surging food and energy prices show no signs of slowing down due to persistent under-investment, disruptions from the Russia-Ukraine war and unfavorable global weather patterns. These supply-side challenges will not be solved in the near to medium term, which may lead to continued high inflation expectations, even as the economy slows down.
Volatile markets highlight the importance of strong diversification within investment portfolios. Real assets, including real estate, natural resources and infrastructure assets, serve as a hedge against losses in growth assets that rerate lower in periods of increasing inflation and interest rates. If, to reduce inflation, the Fed is forced to increase interest rates by more than the economy can handle, a period of elevated credit spreads and poor market liquidity can occur. In this type of an environment, it is paramount to have sufficient liquid assets available to take advantage of market dislocations. HighGround’s portfolios consist not only of real assets but also cash and high-quality bonds that provide liquidity, stability and strength. This allows us to continually seek out investments that can best grow our client portfolios regardless of the market environment.
If you have any questions or concerns, we encourage you to reach out to our team. Despite the challenges we face, we are committed to protecting, strengthening and growing your mission.