In the second quarter of 2022, investors experienced yet another negative period across both fixed income and equity markets. Sid Vaidya, Chief Investment Strategist for U.S. Wealth, recently sat down with Anthony Okolie in a MoneyTalk interview to provide insight into the key drivers of Q2 returns, the economic outlook and how clients might consider to be positioned in the current and expected future environment.
Though elevated inflation, central bank action, and geopolitical concerns remained the key themes of both the first and second quarter, one important distinction between the two was evident. "In the first quarter, investors were worried that inflation was very high, and the Federal Reserve was too far behind the curve to get inflation back in line," Sid explained. In contrast, Sid pointed out that in Q2 investors took the opposite view, that the Federal Reserve was raising interest rates too fast. "Investors shifted their concern to the Federal Reserve doing too much, and possibly inducing a recession, so we moved from an inflation scare to a growth scare," Sid further explained.
Expectations for the economy, markets, and how investors should be positioned
While inflation is expected to remain elevated, it should begin to moderate into year-end. Sid notes that because the Federal Reserve is "laser focused" on fighting inflation, their actions may lead to a slower economy and thus slower corporate earnings growth. As a result, Sid recommends that investors consider focusing on higher quality stocks that can weather an environment of slowing growth, such as "companies that have resilient balance sheets and consistent cashflows/earnings growth."
Another area of opportunity that Sid highlights is considering dividend growth strategies. Companies that have traditionally paid a dividend are typically the same types of companies with resilient balance sheets and consistent cashflows. Therefore, with a dividend strategy, you might be able to get exposure to high quality companies while also picking up the dividend yield.
On the Fixed Income side, higher yields and lower bond prices may present opportunities for better entry points and future income potential. Treasuries and higher quality corporate bonds are recommended as they potentially could provide a consistent source of income while treasuries may also provide stability and diversification benefits.
In the short term, both equity and fixed income markets are likely to remain under pressure, given the rising rate environment and challenging path for central banks. However, it is important for investors to remain focused on their longer-term investment objectives. During this challenging market environment, Sid offers some perspective by pointing out that over the past 40 years, bull markets have historically lasted more than twice the length of bear markets and that staying invested has typically served investors well in the long run. Sid's advice for investors is to stay connected with your financial advisor, assess your risk appetite and if appropriate, "stick to your financial plan, have a diversified portfolio, and focus on high-quality investments, as ultimately this is the best way to achieve your financial goals."