Market and Economic Commentary

2nd Quarter 2022
Summary: Overview

  • The dual shocks of COVID shutdowns and the war in Ukraine, along with expectations of future inflation, caused interest rates to increase substantially through the end of June. Equity markets did not react well to these stimuli. However, absent any new economic shocks, we may see a period of normalization in inflation trends over the upcoming months.
  • “The cure for high prices is high prices.” In the second quarter, the startling rise in commodity prices and interest rates led to a slowdown in economic activity, which may dampen the rate of inflation. As we enter the third quarter, rapid price increases in commodities appear to be abating somewhat.
  • For now, corporate output, utilization and profits appear strong and do not signal a recession.
  • Consumer balance sheets remain relatively healthy, but confidence is declining and the housing market has taken a breather. Consumer confidence may erode further if inflation is not brought to heel. Consumer loans and credit continue to increase, but delinquencies have ticked up for two months in a row; banks have begun to tighten lending standards. On a positive note, input costs for new home construction, namely lumber, generally have declined in recent weeks. If the latter continues, the price of new home construction may ease.
  • Overall sentiment levels have not been this low since the Great Financial Crisis of 2008. In fact, one of our favorite sentiment measures, the Bank of America Sentiment Level, is at zero, a level that historically has coincided with market bottoms. No guarantees!
  • Parts of the market appear inexpensive, pricing in a lot of bad news/negative earnings revisions. Thus far, companies generally have been able to pass through price increases without much pushback. If this trend holds, margins and profits may surprise market participants.

Download the full report in pdf here: IMVA Investment Review-July 2022

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