“The dollar is our currency, but it’s your problem.”  —  John Connally, U.S. Treasury Secretary, 1971-1972

Third Quarter Recap

Financial markets fell broadly after a roller-coaster summer. Equities rose sharply for the first several weeks of the quarter, but swooned in the last half of the period. Fixed income did the same, as did oil, copper and other commodities. Even gold and other safe havens fell. The U.S. dollar was an exception, marching upward against all other major currencies with rising U.S. interest rates proving attractive to foreign investors.

After a dismal six months, oversold conditions and better-than-feared second quarter earnings led to a sharp 14% rally in the S&P through mid-August. Indeed, many market strategists and technical analysts surmised that the bear market was over and that an entirely new bull market had begun.

A Fed Plateau, Not a Pivot

The major rationale for market bulls at the beginning of the quarter was that the rate of inflation had peaked and the Fed would soon taper increases in the Federal Funds rate, perhaps even lowering rates early next year. Unfortunately, inflation reports continued to run hot with some Fed officials lamenting that the market rally made financial conditions too loose to cool off prices.

In late August, Chair Powell delivered a toughly worded speech at the annual Jackson Hole Symposium stating that lowering inflation was the number one goal. However, it would involve some economic pain, possibly even a recession, though he stopped short of actually predicting one.

Both stock and bond markets sold off sharply following Powell’s remarks and continued to do so after Labor Day, with strong non-farm Payroll and Consumer Price Reports reflecting the persistence of inflation in the economy. This was followed by another 75-basis point (0.75%) increase — the third in a row — at the Federal Open Market Committee (FOMC) meeting in late September. Committee members signaled that the Fed Funds rate could approach 4.50% by early 2023, remaining at that level for most, if not all of next year.

The Problem of “Sticky” Inflation

The rate of inflation remains uncomfortably high, even though gasoline and food prices have dropped somewhat since spring. Housing-related costs, another major inflation factor, have been weakening, although rents will continue to stay up for a while. This is due to rental contracts renewing annually and still reflecting elevated market prices from the previous 12 months.

Wages may be even more intractable, as the job market remains very tight. Salary increases are running over 5% and will continue with close to 10 million jobs still open from the pandemic. Although some companies are anticipating a recession and have announced layoffs, many others recall the difficulty of hiring people over the last two years and are hoarding employees to keep from losing them.

The Strong U.S. Dollar and Its Effects, Both Here and Abroad

A strong dollar may help the economy somewhat by making imports cheaper. At the same time, it makes our exports more expensive, hurting the earnings of U.S. multinational corporations. It also causes problems for other currencies. The quote at the top by John Connally (a former Treasury Secretary and the Texas governor who was seriously wounded during the JFK assassination), sums up a long-held fiscal and monetary truism: the American economy is looked at first, and foreign markets will be taken into consideration only if something goes horribly awry.

The U.K. recently had a brush with adversity when its new government introduced a stimulative fiscal policy that clashed with the tight monetary policy of the Bank of England (BOE). Fortunately, the British government soon reversed its course and dropped its more controversial tax proposals, which helped to stabilize the pound and its bond market. Nevertheless, the U.S. Treasury and the Fed will have to keep an eye on foreign developments.

The Outlook for the Remainder of 2022

As mentioned in previous reports, we have consistently dialed down portfolio risk this year by:

  • Reducing equities
  • Increasing short-term fixed income investments (such as money market funds, whose principal value does not fluctuate while their yields have jumped since spring)
  • Adding to satellite (alternative) strategies

At this point, a recession by late 2023 is a 50-50 probability.

  • Inflation will have to fall significantly than it has so far to cause the Fed to relent from its tight monetary policy.
  • One key to inflation is the job market, which must cool off to cause inflation to follow suit.



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.