17 Jun 2022
The Fed commits
Any question of the Fed’s resolve to fight inflation can be put to rest for the time being. Yesterday, the Federal Reserve Board hiked the Fed Funds rate by 75 basis points (bps), something that hadn’t been done in a single meeting since 1994. The upper end of the targeted range now stands at 1.75%, and officials were unanimous in the belief that rates will increase to at least 3% by year end. The rather rapid shift from what had been an anticipated 50 bps hike to the agreed upon 75 bps came thanks to the inflation print this past Friday; the Consumer Price Index (CPI) for May came in at 8.6%, above the estimate of 8.3%, hitting a 40-year high. The more aggressive stance was sufficient to put downward pressure on the 5-year inflation breakeven rate.
But while consumers may appreciate the Fed’s actions, stock markets have responded rather unkindly after an initial short lived relief rally. Seemingly market participants were initially cheered by the Fed’s courage (?), but after thinking about it overnight, they came to the realization that growth just might be hampered by such efforts, shocking, I know. Separately, but germane to that discussion, the Atlanta Fed’s GDPNow forecast for the second quarter has fallen to 0%.
You would think that slowing growth and rising costs would cause analysts to be reducing earnings estimates and margin expectations, but you’d be wrong. Such forces have yet to make an impact on the sell side community, which continues to believe that margins will not only remain high, but will increase in the second half of the year; a belief that defies all logic.
At the midway point for the month, every asset class that we model or track is in the red, save for Chinese equities; the MSCI China Index is up 3% month-to-date. Managed futures funds, which have the ability to go long or short stocks, bonds, commodities, and currencies are also faring well. Mutual funds that we utilize in the category are up from between 3.2% to 11.6% for the month. But beyond those two bright spots, the investment landscape is quite grim (and that’s before today’s broad selloff). REITs have been hit the hardest, losing 9.4%, followed by international developed stocks, which have fallen by 8.7% in dollar terms (the dollar’s strength contributed about 335 bps to that decline), and U.S. large caps, off by 8.2%. The best performing broad equity category, thanks to China, is emerging markets, which is “only” down 5.2%. The Bloomberg U.S. Aggregate Bond Index is also down 3.1%, failing once again to provide ballast to equity-heavy portfolios. The “sell everything” market persists for now, but based on today’s action, perhaps we’re getting close to capitulation, a necessary condition to start anew.
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses, but gross of advisory fees. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Frontier may modify its process, opinions and assumptions at any time without notice as data is analyzed.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. Frontier does not directly use economic data as a part of its investment process.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.
| ASSET CLASS | INDEX | INDEX DESCRIPTION |
| U.S. Large Cap Equity | S&P 500 | Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ |
| International Developed Equity | MSCI EAFE | An equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada. |
| Chinese Equity | MSCI China | Captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips. |
| Emerging Market Equity | MSCI Emerging Markets | An Index that captures large and mid cap representation across 27 Emerging Markets (EM) countries |
| REITS | FTSE NAREIT Equity REIT | A free-float adjusted, market capitalization-weighted index of U.S. equity REITs. |
| Investment Grade Bonds | Bloomberg U.S. Aggregate Bond | Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable. |
Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and are available on our website www.Frontierasset.com. They include important disclosures and should be ready carefully. Frontier Asset Management is a registered investment adviser with the U.S. Securities and Exchange Commission; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information about Frontier and its investment adviser representatives is available on the SEC’s website at www.adviserinfo.sec.gov.
Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.
Frontier’s use of external sources should in no way be considered an endorsement. Reader accesses sources at their own risk. Frontier is not responsible for any adverse outcomes from sources provided and cannot guarantee their safety. Frontier does not have a position on the contents of the site sources. Frontier does not have an affiliation with any author, company, or security noted within. Frontier reserves the right to remove these links at any time without notice. It is generally not possible to invest directly in an index. Exposure to any asset class or trading strategy or other category represented by any index is only available through third party investable instruments (if any) based on that index.
© Morningstar 2022. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
061722DWM061723