A summary outlook for the second half of 2022 for the stock market and economy

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A good read, but a long one ?

A summary outlook for the second half of 2022 for the stock market and economy

Written June 10th, 2022

Update June 17th , 2022

Closing Price of Market on June 17th , 2022

S&P 500??3,674?down ?-24% YTD

Nasdaq???10,798?down -31% YTD

Dow???????29,888?down -18% YTD

A look ahead to the second half of 2022:

Summary Report (This report is a summary and does not contain the details of each recommendation that clients have received on June 17th, 2022)

An early disclosure.?

Aurora Strategic Advisors is a Registered Investment Advisory firm, and as a "fiduciary," we must do what is best for our clients. Therefore, we must always put our client's needs first. Since we are a Registered Investment Firm (RIA), we can recommend any stock, mutual fund, bond, Certificates of Deposit, insurance company, annuity, and many types of investments.

Some firms and individuals that are not "fiduciaries" are not held to the same level of accountability by the SEC or the State of North Carolina.??

Commentary

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The first half of 2022 has been a difficult one. When I looked back at the outlook report for ?2022, completed in Dec of 2021, we saw several different obstacles for the market in the first half of the year. ??

I saw the potential for at least a 15% correction based on standard conditions. Still, we did not see the impact of Russia invading Ukraine, which exacerbated the supply chain of oil, natural gas, fertilizer, and the food supply. In addition to the war, I believe the attack on fossil fuels has stoked inflation to a much greater level than I saw in December of 2021.

I took the stand last year that inflation was never transitory and voiced my opinion in several public posts and stressed it to clients. My opinion was based on pricing increases occurring in the oil, auto, and food sectors and how the current period reminded me of the 1980s. ?

I saw the 10-year Treasury around the 1.75% mark, which was a substantial increase back in December, but today we are at 3.49% and rising. The increase partly leads to the Federal Reserve staying too long with the "Transitory" theme and not being aggressive enough with rate increases. However, the 50 basis point increase in May and the June increase of 75 basis points are a little too late for my taste, and it will cause inflation to continue to be a thorn in the side of the economy for at least the remainder of 2022 and going into 2023.

Finally, at the time, I made a bold call on $100 for a barrel of oil, and we are still at that point and climbing. Gas has flirted with the $5.00 range, but in some places in the U.S., it is already over $7.00 a gallon. I believe that we will test the high range of $6.00 a gallon locally before we see any relief.

In Dec of 2021, I believed that 2022 would be different than previous years as the world recovered from the impact of the Covid viruses. I believed it would be a grind to the positive, but it would be a rollercoaster ride. We have seen some lows and some impressive rallies in the market that strengthen the argument of why investors need to stay invested in quality holdings

When I preview the upcoming six months, I look at many factors, but we do not have a crystal ball. Some things occur at the last moment or outside our visibility, such as Russia's invasion of Ukraine and the global ban on their oil, natural gas, and various exports to other countries. These events, sometimes called "Black Swan Events," occur and can have an unpredictable impact on global and U.S. economies. However, if an investor looks at the history of the U.S. stock market long term, it is one of the best investment vehicles for achieving one's financial goals.

The economy and the market have room to recover in the second half, and all is not full of doom and gloom, but I will address this later in the report.

?Disclosure

In the past, I created this report for clients to give them a preview of what I saw ahead for the market. The goal of this report was to make new recommendations, changes, or deletions to a client's portfolios, as well as a preview of what was potentially on the 6-month horizon.??

?However, I have found the reports were shared with non-clients, so I modified the content with additional disclosures.?

?Since I am not familiar with non-client portfolios or non-client investment risks, I would advise them to speak to a financial advisor or schedule a free consultation with our office (minimum assets required) before acting on anything in this report. This report will be a summary of portfolios for the general public and will not contain actual individual recommendations like the client version.

Should an investor act independently, consider your time horizon and investment risk level and do additional research to cover your due diligence. This report is not designed for day trading or short-time horizons. When I look at any trend, economy, or investment, I take a long-term view of our recommendations and the suitability of our clients.????

?2022, the second half ?

Over the last several years, the S&P 500 performance has seen about 60% of its YTD come from about twenty-five to thirty stocks. This means that a small fraction of technology stocks are carrying the other 460 to 470 other stocks. As in past years, this is not healthy for the breath of the S&P 500, and it has led to a negative performance of -24% YTD. I believe the selloff in technology names within the S&P 500 has been over-done. There will be a recovery in some big-name technology companies like Amazon, Microsoft, Alphabet, Meta, Block, and other names, as well as other strong companies.

The Nasdaq has felt the total weight of a correction as it is loaded with technology names. At this point, the Nasdaq is down about -30% YTD as the high valuations for some names come down from their Covid levels. However, I am still maintaining my bullish position on the overall market and can see the overall market still grinding out a gain, which technology will lead.

Inflation

Inflation will be the wildcard event in the second half of 2022 and 2023. I'm afraid I have to disagree with the current Administration on the blame for high inflation. I believe the root causes are governmental policies, a lack of Federal Reserve response to rising inflation, and Covid stimulus funds.

The Russian invasion did not help, but the process was already in motion, which was an additional factor that pulled inflation over the top. ?

How the Federal Reserve handles, the economy will be critical. Chairman Powell left the door open for another 50 to 75 basis point increase in interest rates. My main concern with the economy is whether we are slowing down naturally as the supply chain improves, or have consumers realized that they are taking higher amounts from their $2.6 trillion saved during the Covid pandemic?

Suppose the Federal Reserve over-reacts with too many rate increases or the potential threat of ever-ending additional increases. In that case, bank lending will slow down to a trickle, and we could see an increase in unemployment rates that we have not seen since Covid began.

High inflation has led automakers like Telsa to increase the price of their cars and the higher costs of gas, energy, and food. As the cost of borrowing money increases, so does the cost of credit.

The point of rate increases is to cool the economy and curve consumer spending.

The other day, one of the media reporters stated that he would not be taking a yearly trip to Salt Lake City for skiing. He was trying to price coach tickets for the flight, which would be almost $2,000 per person, and he has five family members; it was way too high.

According to the hospitality industry (Airline, hotels, cruise lines, and general travel), they are booked through the end of 2022, and bookings are strong going into Q1 2023. All this activity is at elevated prices that the consumer is willing to pay because of excess savings built up from government stimulus packages, employees working from home, and the consumers' lack of being able to travel or dine out due to Covid.

Some feel we are already in a recession, and to a degree, they are not entirely wrong, but we are not in a full-on recession. According to who you ask, a recession is when a negative decline occurs in the gross domestic product (GDP) for two successive quarters. In addition, we see a rise in unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period. We have not seen this scenario ultimately appear, so I am in the camp that we will not see one until 2023.

However, recessions have always been part of a normal business cycle in every country's economy, and they are not always a bad situation.

To summarize my take on inflation. First, should the Federal Reserve get lucky and achieve a soft landing in the economy, any recession will be short-term and minor in impact. However, if they don't get it right, the economic damage could be more significant, and a recession could be great in duration.

With the supply chain returning online and consumers willing to curve their buying habits, I think the Federal Reserve will succeed in its mission.

Gas, Energy, and Food Prices

Recovery in these areas will be more challenging to achieve.

First, gas prices and energy are going nowhere but up in the immediate future. I will not get into a blame game on this subject. Still, I believe mistakes are being made at a policy level for fossil fuels, and the dramatic change from fossil fuels to more climate change-friendly sources is significantly impacting pricing.

As much as I believe in alternative energy like electric, solar, and wind, I understand on a large scale that these are still very costly technologies, and bringing the cost down is still years away. A price to be paid for these new technologies is the price consumers will pay for oil, gas, and natural gas since some feel these fuel sources are out-date and bad for the climate.

The Biden Administration signed a generous infrastructure package early in the year, and it has already been funded to states throughout the U.S.

However, even though the timing was critical, infrastructure is not something that turns on a dime. For example, a major electric company in Ohio recently forced a rolling blackout on its customers due to high consumer demand in the past few days. According to officials, there was the potential for the electric grid to collapse if they did not act.

Of course, rolling blackouts are not new, but this early in the year is new to Ohio.

In the first half, we have seen a significant increase in grocery prices, fuel, home building, shipping, transportation costs, airlines, hotels, and other production increases. Yet, in many of those areas, there has been little decline in the demand for those services.

I am keeping my bullish call on the market.

Even though portfolios have declined in value, I strongly believe in the quality of the names of each holding. Each portfolio holds some of the best names in the industry. Companies like Target, Qualcomm, AMD, Square, American Airlines, American Water Works, and Applied Materials are leaders in their sectors. They also control market share in their sectors, have strong balance sheets, and, as a necessity for inflationary times, have strong cash flow.

During the last quarter's earnings calls, a critical factor that cannot be overlooked was what executives were saying about future visibility. Some company CEOs manage investor expectations during their calls even though analysts have not decreased their earnings outlook on companies or sectors.

I have always maintained with clients that companies with solid cash flow, brand awareness, and substantial market share or managed their cash wisely find a way to weather storms like high inflation.

?As the war in Ukraine continues, I believe Europe will struggle with higher inflationary worries, and global food inflation will impact developing countries to a substantial degree.

Investing in China will be another area I question since lockdowns continue to plague the Chinese and global economies. ?

?My outlook on bonds has changed recently. The yield on the 10-year Treasury Bond has gone from 1.75% to testing the 3.5% range and beyond. Under certain conditions, I could see it reaching 5% to 5.5% by the end of the year.

?Mutual funds and ETFs have not been immune to any factors in this report. For example, some index funds that track the S&P 500 are down -23% YTD, and the Nasdaq 100 index is down about -30%. In addition, some popular mutual funds are down 40% to 50%, depending on the type of mutual fund or ETF, and there are a few funds down 70% YTD. ?

Therefore, due diligence in 401k, IRAs, and other corporate retirement plans will be critical for the remainder of 2022 for both employees and employers. This will be a year of close peer review and high fees charged by some mutual funds

?As I had stated in my first half outlook, in the last few years, employees have become more aggressive and may be having a shock as they review their 401k/403b balances. Therefore, before making significant changes to any portfolio, review your reasoning for selecting funds. Don't make knee-jerk reactions.

I mentioned in my previous report that I believe we may start to see a move away from passive management funds like indexes and Target funds since they did not protect investors from sizable declines. However, based on historical tracking, active management may come back in favor and outperform passive funds.

On the other hand, employers must strengthen their fiduciary capacity and due diligence policies to protect the plan and the employer's liability.?

?However, on a positive note, the pullback in any market allows investors to use dollar-cost averaging strategies to purchase shares of their investments at lower prices. I believe this is a substantial buying opportunity for 2022 because stocks have been over-sold.

We have seen a decline of greater than 20%, which would qualify it for some as a crash and, for some, a bearish market. In the first half of 2022, I was looking for a correction of 15%. However, as I mentioned earlier in the report, higher inflation has exacerbated the pullback, which is the rationale for the additional 10% to 15% decline. ???

?I believe many of the high valuations have come from investments and opportunities available for investors. However, as mentioned earlier, companies that have complete control over their ability to raise prices and control costs will be rewarded by investors.

Precious metals like Gold, Silver, and Platinum, which have done well in inflationary times, have seen their prices up and down, but other non-precious metals have outperformed.

?Cryptocurrency has seen its price rocked in the last few months as investors have become concerned about regulation and price valuations. Bitcoin, Ethereum, and Solona have been discussed as hedges against inflation, but I have not reached that conclusion myself. Bitcoin has broken through the support of 25k and now trading below 20k.

?I recommend speaking to a financial advisor and creating a financial blueprint for your program. But unfortunately, I find that 9 out of 10 clients who walk into our office do not have any plan in place and even lack a proper understanding of everything they own.

If you're considering a retirement package from your employer or changing employers, interview at least two advisors before deciding to roll over your funds.

As I had mentioned earlier this out-look does not include our “ Sustainability Theme Portfolio for 2022”

Due to information contained in our disclosure statement, our portfolio is provided to clients with whom we have a working relationship and understand their investment risks, goals, time horizon, suitability, and tolerances

In the future, I am looking to have a forum where I could discuss the report in detail and allow clients to ask questions about why we were adding certain positions and not others. It is a challenge to find a venue that will hold 100 plus clients and is centrally located for them. I will continue to work on this project.

I am new to the whole podcast concept, but it will be something that will be in place for my Dec 21st report when I will publish our 2023 outlook.

I must stress that any non-client looking that has one of our clients share the portfolio, please consult with a financial advisor, speak to me directly or conduct due diligence before investing.

Since this is a live portfolio, it does change throughout the year?

?I am keeping about seven other positions in reserve, and I will discuss those with clients individually.?

Disclaimer:?

Aurora Strategic Advisors' views (ASA) should not be construed as investment advice.?

This material is not intended to be relied on as a forecast, research, or investment advice and not a recommendation, offer, or solicitation to buy or sell any securities or investment strategy.?

Conflict of Interest.?

ASA and our clients hold positions in several of the named stocks mentioned in this report, but we provide no investment advice to the companies named in the report.?

This report is based on a professional look ahead at the markets for our clients who have met with an investment advisor representative at our firm and had their particular investment needs and concerns analyzed.

ASA does not provide or give tax or legal advice.

Please consult with your financial advisor for further information. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

?Please consult with your financial advisor for further information. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.?