Second Quarter 2022 Review

Investors are weighing a laundry list of unknowns in the current environment—how quickly the Fed will raise rates, whether and when inflation will moderate, how long Russia’s war will continue, whether the war escalates and turns global, and whether the pandemic is truly over. Our base assumption is that equity market volatility will continue as these questions continue to weigh on sentiment.

At the same time, the U.S. economy is on relatively strong footing and history reminds us that markets have endured far worse and proven resilient. When the Korean War broke out in 1950, for example, inflation in the U.S. was close to 20%, Congress was raising taxes to finance the war (the top capital gains rate was 62%!), and tens of thousands of U.S. troops were being sent to fight. The economy nevertheless expanded and markets rallied throughout the war. We would argue the U.S. economy is in far better shape today than it was then.

Even still, higher inflation and higher long-term interest rates are likely to pressure valuations in certain areas of the stock market, which we believe could lead to greater dispersion in equity returns and an increased need for active management.