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Life, the Universe and Everything...2nd Quarter 2022 Commentary

Last Friday, as most were getting ready for the long July 4 holiday weekend some of us were contemplating what to say in our quarterly newsletter. Compiling end of quarter data and sifting through a myriad of historic facts. And as we did so some interesting information came to light.

First, The Dow and S&P 500 posted their worst quarter since the first quarter of 2020 when Covid lockdowns sent stocks tumbling. The tech-heavy Nasdaq Composite was down 22.4% for the second quarter, its worst quarterly performance since 2008.

That added to a poor showing in the first quarter. For 2022 the Dow is now down more than 15%, the S&P 500 is down more than 20% and the Nasdaq is down about 30%. The only positive sector, and the only reason the Dow and the S&P500 were not down more was energy. The S&P 500 posted its worst first half of the year since 1970, hurt by worries about surging inflation and Federal Reserve rate hikes, as well as Russia’s ongoing war on Ukraine and Covid-19 lockdowns in China. Combine these fears with Washington’s energy policies, their loose money politics and a focus on social justice and identity politics and a basic failure in the supply chains and its no wonder the current administration has watched the stock market drop almost in lock step with their approval ratings.

Second, June was a tough month for all sectors. As a matter of fact, not a single sector ended June in the black. Energy , the ONLY sector that is showing a positive return for the year took the largest monthly hit, ending June 17.1% lower. It was joined by Consumer Discretionary, Financials, and Materials, which all sank at least 10%. (in 1 month??!) Consumer Staples and Health Care, sectors that are typically less sensitive to Fed rate hikes, were the only two trimmed by less than 3%. But as mentioned, the general market numbers do not tell the whole story. For example, the once high-flying technology market has fallen over 30% this year. Fidelity Select 4 star Technology fund is down over 34% while the once 5 star rated T. Rowe Price Global Technology fund is down over 48%. Biotechnology, down significantly in 2021 again is down over 31%.

A 20% drop would be welcome to owners of the FANG stocks. In the First half of 2022 Meta (the old Facebook) dropped 43% and Mark Zuckerberg saw his net worth cut by more than half. Amazon, even after its 20 for 1 stock split dropped over 34%. Jeff Bezos (and I’m not holding a tag day for him) saw his net worth plunge by about $63 billion (yes, billion) in the first half of 2022. Netflix was down over 70% and Google tumbled the least…only 24%. Disney, down 39%. Docusign, down 62%. Travel and leisure stocks like Royal Caribbean down 54% while Delta dropped 26%. Target dropped 38% while Walmart was only down 15%.

Third, the downturn wasn’t centered in the equity market alone, the (now acknowledged) overhyped Crypto market saw some of its ‘projects’ reduced to dust. I mean some lesser-known projects just plain went to ZERO and disappeared in less time than it takes to toast a bagel. Year to date, Bitcoin is down 57.4%, Binance Coin is 57.7% lower, and Ethereum is 70.4% in the red.... These supposed ‘assets’ did not hedge against inflation or anything else. They just proved that the article from 2018 was correct...less than 4% of crypto coins are successful…at all…and that we as a race are no further along than we were during the 1630 tulip craze. (if interested read the book Extraordinary Popular Delusions and the Madness of Crowds, published in 1841 by the Scottish journalist Charles Mackay. In it he postulates that crowds of people often behave irrationally, and tulip mania was, along with the South Sea Bubble and the Mississippi Company scheme, one of his primary examples. One would surmise crypto will be included in future discussions.)

Interestingly, even the ‘smart guys’ lost in the last 6 months. Changpeng Zhao, the crypto pioneer who debuted on the Bloomberg Billionaires Index in January with an estimated fortune of $96 billion, has seen his wealth tumble by almost $80 billion this year amid the turmoil in digital assets. And a perennial favorite and current lightening rod, Elon Musk, battling for control of Twitter, lost a cool $62 billion as the wealthiest billionaires on the planet saw their net worth cut by $1.4 Trillion. The worst half year ever.

And fifth…and wait, it gets better. Bonds and bond buyers have had a similarly horrible year. (Decade?) As bonds react primarily to interest rate movements, when the Fed spoke with an increasingly hawkish tone the market reacted. Short-term interest rates shot up in June following the Fed’s announcement of a 75 basis point rate increase, the largest since November 1994. The rate on 1-Month T-Bills was 1.28% as of the end of June, representing a monthly increase of 55 points. The 3-Month T-Bill stood at 1.72% while the 6-Month T-Bill surpassed 2.5% for the first time since March 2019, logging monthly increases of 56 and 87 points, respectively.

The 10-year Treasury has lost over 13% of its value (yes lost value) in the first half of 2022. If you had purchased this government bond in 2020 you would have, on paper, a loss of over 25%. High yield bonds, or what is known as Junk, has fared worse. The average junk bond fund has lost over 14% in the first half of the year.

(Much of this has to do with the real rate of return for bonds. Think of the real rate as the coupon subtracted from the rate of inflation. If the coupon on a bond is 3% but CPI (i.e. Inflation) is running at 8.5 then the real rate of return is --5.5%. So the fact is bonds have lost money for at least the last 4 years and have not had a positive rate of return over 1% since 2015. The total return for bonds in the last 10 years is a cumulative -6%. Ouch. Please read my post Are buying Bonds a Safe Investment?)

That bond slump is bad news for conservative investors, retirees living on a fixed income and anyone trying to buy a house. Mortgage rates have been spiking along with bond yields, because rates rise as bond prices fall. And as bonds have plummeted this year mortgage rates have gone from 2.2% to almost 6%.

(Interestingly, according to the Stansberry Digest, the entire global bond market hit 5000-year lows in 2020. Yes, 5000 years. They cite the 'first data tablet' which showed Mesopotamian interest rates from 3000 BC to 400 Ad. Thats when rates on trading grain and silver lending ranged between 20% and 50%. So, 6% must look pretty darn good to Mesopotamian traders...)

By every metric, the first half of the year was lousy for investors as stocks sank, cryptocurrencies crashed and even the supposedly less risky bond market performed poorly.

So where does that leave us? I mean it does sound like the world for investors is in pretty bad shape and maybe it's better to hide in your basement until it's over?

Well by now you know me better than to think I would say it's time to hide. To me bad markets are the perfect time to invest. But let me explain.

History shows us that markets overreact. They swing too high and become euphoric, and then they swing back the other way and become overly pessimistic. Today we face a number of challenges. As discussed, a Federal Reserve at odds with current administration officials, a poor energy policy, a war in Europe, 50 year high inflation and as Deutsche Bank reported, 'during the first half of 2022 the 10-year U.S. treasury note logged the worst performance since 1788 ( to remind everyone that's about the time George, Ben and friends ratified the pretty much since the beginning of our country).

So, if the stock markets are tumbling, bond markets are performing the worst they have since the country began and there is a disconnect between those in charge in Washington what do you do? The answer. e3.

I know it sounds simplistic, but markets have always moved. I cannot cite two trading days in my career where the market closed at exactly the same point. There is always fluctuation, always fear, always naysayers and always...repeat...always, opportunity. But you have to be prepared. You have to be prepared for drawdowns of principal and you have to be prepared for volatility.

If you are in retirement, then e3 should help prepare you. Empower is the first 'e' and is where we design a platform, a strategy and a plan that then works to grant you a sustainable income stream. Enhance is the second 'e' and where we strive to grow your assets over time. The third 'e' elevate, is long term growth money. This is perhaps the most volatile portion of the portfolio but is where you should concentrate on building multi-generational wealth.

By embracing the 'e3' model you can avoid the mistakes most investors make of buying high and selling low. It really helps remove the psychological 'fight or flight' reaction when one feels uncomfortable. If you are empowered, and you have an income stream that allows you to live your life then the volatility of the market, although real, should not change your life.

I'm not suggesting sticking your head in the sand, but I am a fan and believer in history as a guide. And history has shown us, WITHOUT FAIL, that every bear market has been followed by NEW ALL TIME HIGHS in the stock market.

The question people ask is when will it happen?....and while there is not a single correct answer the true answer is it depends. The average breakeven since 1928 was 26 months while in the modern era, (think the MTV, everything happens quickly, short attention span era) the average is around 17 months. Half of bear markets have seen break evens lasting less than a year and a third have taken two or longer...

So, in conclusion, while there is no guarantee, it can be said that bear markets have, in the past, always lead to new market highs. The e3 model helps one deal with the mental anguish associated with losing money on paper...because it can help you from turning that paper loss into a real one. Having a plan and sticking to it is invaluable during times of stress. e3 can help you deal with the stress so why not talk to us about instituting our model?

The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, Quantum Private Wealth and its employees is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework.

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