The Economy Shrank, But Are We in Recession?

The Economy Shrank, But Are We in Recession?

Today marks Adviser’s 28th anniversary! Please see below for a note on the occasion from Chairman Dan Wiener.

It was a busy couple of days for data, quarterly reporting and Federal Reserve pronouncements. Here’s what moved markets this week:

  • The Commerce Department announced this morning that by its first estimation, U.S. GDP shrank by 0.2% in the second quarter. While the news will encourage more recession claims, we don’t think it’s a foregone conclusion (more on this below).
  • The Federal Reserve raised the fed funds rate by 0.75% after its meeting yesterday—the second consecutive move of that size. In a statement, policymakers said they expect “ongoing increases…will be appropriate.”
  • Consumer confidence slid for the third straight month in June. While we prefer to focus on what consumers do rather than what they say, pessimism about the future tends to lead to increased savings and reduced spending, which could further slow economic growth (and inflation, as the Fed intends).
  • Second-quarter earnings reports started off a little weak, but the trend has been improving. At the start of reporting season, expectations were for earnings to come in 4% higher compared to a year ago. Today, with about half of S&P 500 companies reporting, earnings are on course for 6% growth over the past year. Despite negative economic growth, earnings are still rising—and that’s been enough to support the stock market this month.
  • Both the U.S. bond and stock markets are heading for their best monthly performance all year, with the Bloomberg U.S. Aggregate Bond index up 1.7% and the S&P 500 index up 6.4% through Wednesday’s close.

Fed Hikes, Market Spikes

Few were surprised by the Fed’s 0.75% hike to the benchmark fed funds rate and traders were encouraged by Fed Chair Jerome Powell’s comments at the post-meeting press conference. Yet the tech-heavy NASDAQ Composite index rose about 2% in the final hours of the day. Why?

While Powell said that policymakers “wouldn’t hesitate to make an even larger move if necessary” to curtail the inflation problem, he also noted that it will likely be appropriate to slow the pace of interest-rate increases. Powell also said that he doesn’t believe we are in recession, even if the key indicators he watches closely may be “softening.”

Stock traders and Fed observers saw this as a sign the bank will be ready to reverse course and cut interest rates quickly should inflation be tamed and the economy seize up—to the potential benefit of growth stocks.

Chart of the Week: How the Bond Market Prices In Fed Policy

Interim Chief Investment Officer Jeff DeMaso

Traders and investors spend a lot of energy trying to predict the Fed’s actions. The Fed also spends a fair amount of effort telegraphing what it is planning to do; an unwritten policy is to try to avoid “surprising” the market. The result? By the time the Fed acts, bond traders have more often than not already priced in the move.

You can see this in the chart below, where I’ve plotted the yield of the three-month Treasury bill alongside the fed funds rate (specifically, the upper bound of the Fed’s target range). The two rates largely move together—no surprise there. The key insight, though, is that the T-Bill’s yield leads the fed funds rate.

So the Fed hiking rates yesterday made headlines, but for bond investors it was already old news.

This chart shows the yield on the 3-month T-bill from the end of 2021 through July 27, 2022 as well as the upper bound of the target fed funds rate.
Note: Chart shows daily yields for three-month Treasury bills alongside the upper bound of the Federal Reserve’s target range of the fed funds rate from 12/31/21 through 7/27/22. Source: The Federal Reserve Bank of St. Louis.

Bonds Are ‘Self-Healing’ How?

Senior Vice President, Fixed Income Manager Chris Keith

Bonds have a special quality that sets them apart from other asset classes—they are self-healing.

What do I mean when I say bonds are self-healing?

The mechanism is simple: When you buy a bond, you are purchasing an asset that has a known outcome. Individual bonds have a face value, a stated interest rate and a maturity date. And, as a fixed contract when they get to that date, they mature at “par,” or face value. In short, the issuer is obligated to pay back the money they borrowed no matter how low the bond’s price may have fallen while the investor held it. So long as the borrower doesn’t default, the only way an investor will receive less than the bond’s face value is if they sell before it matures.

Let’s see how this played out for a real-life two-year Treasury bill over the six months before it matured at the end of June.

This chart shows how bond prices "self-heal" as they reach maturity, even if the bond market is falling.

Note: Chart shows daily market value (bond price) for the two-year U.S. Treasury 0.125% that matured on 6/30/22 as well as the daily cumulative return for the iShares Core U.S. Aggregate Bond ETF (bond market return) from 1/3/22 through 6/30/22. Sources: Bloomberg, Morningstar.

Over the period shown, this Treasury bond’s price fell and then recovered to par value even though rates were rising and the bond market was declining during the entire period. This quality is not unique to Treasury bonds—the same thing happens with municipal and corporate issues.

Seeing your bonds fall in price is never fun, but due to their contractual nature, bond prices will heal if only given time to do so.

Please click here to read Chris’ full commentary along with his explanation of how this principle works to the benefit of bond fund investors too.

Note From Chairman Dan Wiener

Thank you! Twenty-eight years ago to the day, on July 28, 1994, Adviser was incorporated. The goal from Day One was to provide our clients with the full range of wealth management services typically offered by large, white-shoe firms combined with the personal touches of a boutique. And our aim was to do so as a true fiduciary, free from the conflicts of interest that so many others in our business have fallen prey to.

In many ways, our team has succeeded beyond my wildest hopes. Our deep bench of financial planners and wealth managers are supported by an industrious back-office team and secure and efficient technology, an enormous step up from our early days when two IBM PCs, a fax machine and a laser printer constituted our “tech stack.”

As we embark on the next 28 years, I am confident that my Adviser colleagues are among the smartest, most diligent and hardest-working people in the wealth management business. I take tremendous pride in the fact that our company is regularly cited as a “best place to work in money management” and most importantly, that many of our client relationships have lasted for decades, even as we’ve continued to grow and expand.

I love working at Adviser and am thrilled by how far the Adviser team has come. I look forward to continuing to work side by side with that team as our expanding capabilities are brought to bear on helping you and your loved ones achieve your financial goals.

Again, thank you.

Dan Wiener
Founder & Chairman 

Webinar: Bear Market Playbook

In our third-quarter webinar this week, Interim Chief Investment Officer and Director of Research Jeff DeMaso was joined by Manager of Financial Planning Andrew Busa and Senior Financial Planner Vanessa Carter-Witt to go through all five steps in Adviser’s Bear Market Playbook. They then answered listener questions on Roth IRA conversions, Federal Reserve policy and more.

Click here to listen to the replay now!

And stay tuned for an upcoming podcast with Chairman Dan Wiener and Jeff DeMaso that expands on our market and wealth management outlook as we continue to help you navigate today’s markets.

Buying a Second Home: Is It Time?

Manager of Financial Planning Andrew Busa:

The pandemic-driven housing boom has shown signs of slowing lately, in part because higher mortgage rates are forcing buyers to the sidelines. But prices continue to rise. The Case-Shiller index, a national composite of home prices, rose 19.7% year-over-year in May, according to the most recent data available.

Despite the sticker shock, many Americans are searching for a second home to serve as a weekend retreat or simply to elevate their quality of life. Both are decent reasons if you can find a property that fits your finances. Before taking the plunge, ask yourself some practical questions to decide if the time is right.

Do I know the total costs? A second home adds a slew of new fixed expenses to your budget. As with any home purchase, you’ll need estimates of property taxes, insurance payments, mortgage payments, maintenance costs and utilities when considering buying. And how much will upgrading that 1950s kitchen really cost?

Do I understand the tax implications? You can defray the cost of owning a second home by claiming tax deductions for mortgage interest, property taxes and rental expenses. But there are also tax liabilities to consider: For one, you will need to report income to the IRS if you rent your home for more than 14 days in any calendar year.

Do the numbers work for me? We often advise clients to pay off the mortgage on their primary home before buying a second property, even if they plan on renting it out. As the pandemic made clear, demand for vacation rentals can fluctuate, so you may not be able to count on rental income to make the numbers work.

Buying a second home might be the right move so long as it doesn’t derail your progress toward other long-term goals, like paying for college or retirement. If you’re on the fence, we’d be happy to help you crunch the numbers and think through your options. Let us know!

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income
No trades

AIQ Tactical Global Growth

Sell iShares US Pharmaceuticals ETF (IHE)

Sell Cash

Buy iShares Biotechnology ETF (IBB)

Buy VanEck Semiconductor ETF (SMH)

AIQ Tactical Defensive Growth

Sell iShares Core S&P 500 ETF (IVV)

Buy iShares 20+ Year Treasury Bond ETF (TLT)


AIQ Tactical Multi-Asset Income

Sell Cash

Buy iShares Preferred and Income Securities ETF (PFF)

AIQ Tactical High Income

Buy iShares iBoxx USD High Yield Corporate Bond ETF (HYG)

Buy iShares 0-5 Year High Yield Corporate Bond ETF (SHYG)

Buy Xtrackers USD High Yield Corporate Bond ETF (HYLB)

Buy Invesco Fundamental High Yield Corporate Bond ETF (PHB)

Buy VanEck Fallen Angel High Yield Bond ETF (ANGL)

Sell Cash


Adviser in the Media

Portfolio Manager Adam Johnson had an extended visit with Fox Business, where he looked at how higher rates weigh on the housing market and the impact of economic headwinds on stock prices. Adam also appeared on Cheddar News  discussing why the earnings-negativity pendulum has swung too far.

In this week’s Market Takeaway, Senior Research Analyst Liz Laprade unpacked a weighty week.

Looking Ahead

Next week brings a slew of useful information in addition to data from the ongoing earnings reporting season, with reads on manufacturing, construction spending, the service sector and factory orders, plus several reports on the labor market, including the July unemployment rate.

As always, please visit for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit or call 800-492-6868.

Please note: This update was prepared on Thursday, July 28, 2022, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein—including but not limited to the Your Question Answered section—should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

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