The Rice Partnership’s Chief Investment Officer, Orest Saikevych, discusses whether the recent market rebound is a new bull market or a bear market rally.


Economic and Market Review and Outlook, July 2022

“It’s absolutely essential to restore price stability. Economies don’t work without price stability.”  —  Jerome Powell

Second Quarter Review

Financial markets fell again in the spring. Posting its worst first half since 1970, the S&P was down 16% while the NASDAQ slumped 22%. Foreign markets fared only slightly better with developed markets dropping 14% and emerging markets declining over 11%. Bond prices also slumped, with the yield on ten-year Treasuries rising from 2.34% to 3.01% (recall it was 1.51% at the start of the year).

Commodities were mixed, as metals rallied early in the quarter only to sell off sharply in June. Oil rose, though its gains were more subdued relative to the spike of the first quarter. Gold came off its winter highs, while the US dollar was the standout, displaying strength throughout the spring. On the other hand, crypto assets crashed with bitcoin declining 59%, almost three-quarters from its highs of last year.

An Economic Cycle and Financial Markets in Fast Motion

From an overheating economy in January, to the beginning of Fed rate hikes in March, followed by concerns of recession in June — the first half of 2022 was a whirlwind of gloomy news unlike any other economic cycle since World War II. Financial markets also reflected this dynamic. At the start of the year, there was a rotation out of highly valued stocks into inflationary beneficiaries, then in the spring, a move into defensive stocks that would perform better in a slowing economy.

The effects of the pandemic have made economic forecasting even more challenging. Although there are job openings, many people haven’t returned to the labor force. Government stimulus checks swelled consumer savings but spending patterns have changed. When Covid first struck, people stayed home for safety reasons and ordered goods online like electronics, furniture and home improvement items. Services such as restaurants, hotels and airlines suffered.

As the population became vaccinated, many began venturing out and traveling, helping services recover, while the demand for goods fell. Retailers and other businesses had a difficult time determining how much to order, especially with the persistent supply chain issues. To make matters worse, the war in Ukraine has added to uncertainty about global energy and food prices. 

The Federal Reserve and the Fight Against Inflation

To fight inflation, the Fed has steadily restricted monetary policy, sharply raising the Federal Funds rate from 0.25% in March to 1.75% currently. The logic is that by increasing rates, the overall demand in the economy will decrease, causing inflation to cool off.  Yet rising prices have persisted, with the latest Consumer Price reports revealing they may still have not yet peaked as many economists earlier predicted.

Chair Powell and other members are increasingly concerned that inflationary expectations may become imbedded, leading to price instability and further compounding problems. However, Fed rate hikes along with “jawboning” or tough policy talk have already had some effect in slowing demand, especially in the housing sector where 30-year fixed mortgage rates have spiked from 3.11% to almost 5.30%.

Soft Landing or Recession?

In a soft-landing scenario, growth moderates but does not contract, while a recession features an economic contraction with a significant rise in unemployment. There is a great debate going on about which outcome will occur.

The yield curve has inverted (displaying a negative slope) among many maturities although the most important one — the 90-day Treasury yield to the 10-year Treasury yield — remains positively sloped. While growth has slowed in manufacturing and retail areas and consumer confidence surveys indicate a more pessimistic outlook, other indicators show a moderate expansion.

As mentioned earlier, consumer spending has come off its highs, although this is largely a shift to service spending. There is still about $2 trillion in consumer savings from Covid stimulus checks sent by the government, which provides a cushion against a weakening economy. In addition, the labor market is holding firm, producing over one million jobs in the last quarter alone.

Looking Ahead

Reflecting the more difficult environment so far this year:

  • We have further trimmed our U.S. core equity tilt over bonds and other asset classes.
  • Since January, we have steadily reduced exposure to stocks where possible, with the stocks currently in portfolios having positive earnings, cash flow and good balance sheets. They will be even stronger once inflation subsides and the economy turns up again.
  • Funds have been primarily reallocated into short-term fixed income investments, although if rates continue to rise, we will be increasing our allocation to longer maturities.


The Rice Partnership’s Chief Investment Officer, Orest Saikevych, discusses the bear market and potential of a recession, along with what we are doing in client portfolio to combat the current economic concerns.


“It is appallingly obvious that our technology exceeds our humanity.” – Albert Einstein

First Quarter Recap

Almost all financial market indices fell during the first quarter. Equities were generally lower: The S&P 500 dropped 4.6% while the Nasdaq 100 dipped 20% into bear market territory before rebounding in March.

cncartoons041307 965

cncartoons041307 965

Foreign markets were also down, with the UK and Australian markets bucking the trend and closing higher.

The big surprise were the bond markets. Both longer maturity Treasuries and corporate bonds suffered their worst quarter in almost four decades. However, commodities provided a diversifier with metals such as copper moving higher and the energy complex (oil, natural gas and the like) spiking due to the Ukrainian war. Meanwhile, the U.S. dollar and gold proved to be safe havens once more.

Overshadowing all is the Covid-19 pandemic which has receded in most countries, China being a notable exception. Although variants of the Omicron strain are still proliferating, they appear to be milder than earlier strains. This supports the argument that the disease is evolving much like the influenza viruses a century ago with annual vaccinations likely becoming the norm.

Inflation and the War in Ukraine

The year started with the December Federal Open Market Committee (FOMC) meeting proving even more hawkish than Chairman Powell’s press conference. Investors began to price in more tightening by the Fed, and reports continued to show an increase in inflation. Supply chain issues, as well as labor shortages and the rising price of housing persisted. Higher valuation stocks such as technology sold off as higher interest rates discounted the earnings stream from future years.

By mid-quarter, the markets recalibrated to the new reality, only to sell off again after Russia invaded Ukraine. So far, the war has demonstrated the stiff resistance by the more nimble and opportunistic Ukrainian defenders, as well as numerous strategic errors by the larger but lumbering Russian army. It appears that most of the country, including the capital Kyiv, are now safe from a takeover, though Russian leader Putin is now concentrating his forces on the eastern provinces where supply lines are shorter and his chances for success are higher.

Western nations have responded to the attack by sanctioning the Kremlin economically. This has driven up the price of oil and natural gas, of which Russia is a leading exporter. Also, prices are spiking because Ukraine, a leading supplier of wheat and corn, has not been able to plow its fields nor transport grain from its ports because of Russian attacks. Recently, peace talks have also been derailed due to reports of civilian atrocities committed by invading Russian forces.

Although inflation may soon see a peak, it still appears that the descent will be slow and “sticky”, due to rising wages and housing prices. Any new negative surprises from the Ukraine war will also push the peak out further.

The Effect on Economic Growth

All this has caused growth in the Eurozone (minus the UK due to Brexit) to slow significantly. Countries such as Germany and Italy have imported a substantial portion of their energy from Moscow and now must quickly find other suppliers. Economic growth in China has also been problematic because of Covid-19 outbreaks, especially in Shanghai, the most populous city in the country. The U.S. has not been impacted as hard, at least not yet. We are fortunate to be largely self-sufficient in energy resources, consumers are still flush with $2.5 trillion unspent stimulus money, and the labor market remains strong.

There has been much attention devoted lately to the yield curve. Various maturities have been showing an inversion, or a negative slope where shorter maturities have higher yields than longer ones. In the past, inverted yield curves have often preceded recessions (with a lag time up to two years), although it is debatable whether this is causation – the inverted curve actually causes the recession — or merely a correlation between the two. The curve with the best predictive record is that of the 90-day Treasury Bill to the 10-year Treasury Note, which currently has a steeply positive slope.

The Outlook

Because of these factors, we do not foresee a recession this year or next, although the probability of one occurring by late 2023 has increased about 30%. We will continue to monitor the situation since much can happen between now and then. In the meantime:


    • We have reduced our U.S. core equity exposure slightly but still favor equities over bonds and other asset classes
    • We favor stocks with reasonable valuations and good pricing power to counter higher input prices
    • We have initiated positions in domestic natural gas, defense and agricultural oriented companies, in recognition of the longer-term changes caused by the war in Eastern Europe
    • With interest rates rising to more attractive levels, we have once again started buying municipal bonds for our Hawaii-based clients in high tax

The Rice Partnership’s Chief Investment Officer, Orest Saikevych, discusses the war in Ukraine, the recent FOMC (Federal Open Market Committee) meeting and their effects on the economy and financial markets.