Stocks and Bonds Continue to Search for Direction: Market Commentary from Cabana’s CEO – July 22, 2022

4 weeks ago

  • Share this:

Apologies for the pause in commentary over the past week. I have been on vacation in Colorado with my family. We will pick up our weekly commentary as usual next week.  

Since my last remarks, we got the June CPI (inflation) numbers and they came in hotter than expected. We are now seeing inflation rising at the fastest levels since 1981. This of course has been the worry since the beginning of the year and is the reason for the simultaneous bear market in stocks and bonds that we find ourselves mired in.  

I read an article earlier this week that stated we have just experienced the worst first half of a year in stocks and bonds in history. I haven’t confirmed that claim but can state it is by far the worst I have ever seen. It is no surprise that we periodically get a bear market in stocks, but the concurrent selloff in bonds and other fixed income that we have seen is unprecedented. All of this is tied to inflation and rising interest rates. The continued surge in core inflation reinforces the Federal Reserve’s hawkish position and the near certainty that we will see another 75 basis point hike at their meeting at the end of the month. We may even get a full 1% hike, which would be extraordinary to say the least. These rising rates and inflationary pressures create major headwinds on all growth assets (and temporarily on bonds as well). The current situation is causing a lot of large investors to acknowledge that a recession is now likely, if not imminent. As further evidence of this, the yield curve has now inverted, and the 2-year Treasury bond is paying more than the 10-year Treasury bond. This is not normal and suggests that a significant economic slowdown is on the way. To drive this point home a little more, the current spread inversion is the greatest since the early 2000s… and everybody knows what happened between 2000-2010 (two protracted and steep bear markets). The drop in bond yields (especially the 10-year Treasury) this week is good for the short term and helps risk assets, but longer term….? Suffice to say, markets are in a very precarious position, and it does not appear we are anywhere near out of the woods yet.  

All in all, we continue to see stocks and bonds search for direction, and volatility is likely to continue throughout the summer. It does not surprise me that we are now seeing an attempt at a sustained rally in stocks. It will be important to see if the S&P 500 can close the week above its 50-day moving average. That important technical level has not been achieved since April and could lead to a rally lasting into the early fall. It is around that time that we may begin to see the practical impacts of the interest rate increases on the consumer and small businesses. If smart money sees it first (i.e., the bond market) and the yield curve inversion is right, we may then get to see another leg down in stocks before this bear market is over. 

Disclaimers

June 22, 2022

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV Part 2A or Form CRS. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

All recommendations made in the prior 12 months are available upon request. Cabana’s allocation history is available here. For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/. 

Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq