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For over a decade, markets have benefited from low interest rates and valuations. Many may recall that the Fed struggled to get inflation to reach its goal of 2%. Unfortunately, many droughts end with floods, and a flood of inflation has altered the outlook for interest rates and economic growth, impacting bonds, equities, and other assets.
In late August, the Fed hosted its annual economic symposium in Jackson Hole, Wyoming, culminating in a brief speech by Chair Powell. In his remarks, the chairman shared three lessons learned from the management of monetary policy during the last high inflationary environment from the 1970s and 1980s. His third lesson, “…we must keep at it until the job is done,” invoked a sense of Volcker-era inflation-fighting resolve.
The second quarter saw the wildly successful premiere of Top Gun: Maverick, the sequel to the original Top Gun from 1986. In an early scene, Captain Pete “Maverick” Mitchell took an SR72 Darkstar prototype aircraft past the authorized speed of Mach 10. The plane’s inability to withstand the high speed resulted in it effectively blowing up, though Maverick ejected and safely walked away. One cannot help but wonder if the current situation in the venture capital market is similar. After years of record-high valuations fueled by what seemed to be an endless supply of capital and willingness for risk-taking, a new era of venture capital could be on the horizon.
Investors breathed a sigh of relief in July amid rebounding performance across most major asset classes and categories, despite confirming evidence of a slowdown in U.S. economic activity and a further tightening of monetary conditions by the Federal Reserve. Performance themes during the month favored the rate-sensitive corners of the financial markets—bucking the trend that has generally been in place for the past year—as interest rates declined sharply.
Financial markets came under considerable pressure in the second quarter as steep losses plagued the breadth of the major asset classes and categories. Persistent inflationary momentum, including an upside surprise across consumer price inflation in June, continued to remain a primary concern for the Federal Reserve, Wall Street, and Main Street alike, despite aggressive actions taken by policymakers to temper the upward trajectory. Economic slowdown fears mounted throughout the quarter, with some gauges reflecting an elevated likelihood the U.S. economy may already be in recession.
Traditional asset classes and categories declined sharply in the final month of the second quarter, capping off one of the most challenging first six months of a calendar year in recent memory, as global equities, core and high yield bonds, and real estate investment trusts (REITs) posted double-digit losses through the first two quarters of 2022. Following a modest contraction in GDP growth in the first quarter, estimates for second-quarter growth evolved to reflect the potential for a further contraction in economic activity, suggesting the U.S. economy may be in the midst of a recession.
FEG Investment Advisors hosted an Investment Symposium at Pegasus Park on May 3. The event welcomed more than 100 attendees to hear from industry leaders on investment, economic, and biotech trends. Sessions included a session on Women in Investing; Washington Policy Landscape and Political Outlook; An Introduction to Pegasus Park by Tom Luce; A Biotech Panel: Learning to Fly, featuring investment managers who invest in biotech companies; The Great Energy Debate which looked at public versus private and traditional versus renewable trends in the energy market; and the closing session on Bio Innovation through a New Lens with a conversation between Ben Lamm and Claire Aldridge.
A general sense of unease continued to weigh on U.S. consumers in May, despite a settling in financial market volatility. The continued sharp increase across energy prices helped drive gasoline prices to the highest level in at least two decades, with the national average for a gallon of regular unleaded nearing $5.00. More generally, inflation rates across both headline and core—i.e., excluding food and energy—gauges remained near 40-year highs, although headline consumer price inflation experienced a slight moderation through April before increasing again in May.
The energy sector took center stage in the first quarter of 2022, as economies emerged from pandemic shutdowns, travel increased, and oil and natural gas inventories fell due to limited drilling activity by producers over the past several years. As energy-related commodity prices—e.g., oil, natural gas, gasoline—rose to multi-year highs, the world was awakened to the fact that hydrocarbons are still a necessary and critical part of the energy mix. Then, in late February, Russia’s invasion of Ukraine sparked an immediate disruption in the global energy supply chains, as countries worldwide moved to impose sanctions on Russian oil and gas. Click to learn more!
Volatility spiked meaningfully in April and continued into early May as the U.S. government reported an unexpected contraction in economic activity in the first quarter, and the Federal Reserve hiked the federal funds rate by 50 basis points, the first hike of this size since 2000. Performance across the major asset classes and sub-asset categories was overwhelmingly negative, particularly among rate-sensitive sectors, a dominant theme across the financial markets since mid-2021.
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