This blog will serve as follow up to our previously released Q1 Investment Themes and is intended to provide an update on what we are seeing as well as our current outlook. 

Here are the top three things we are covering in this month’s blog:

  1. Equities bounced back to breakeven on the month.
  2. Persistently high Inflation, especially in oil, natural gas and some food commodities will likely force the Fed to continue raising rates.
  3. The economy is entering a period of slowing growth but increasing inflation, which will likely continue to keep pressure on the financial markets.


For the fourth time this year, the market staged an end-of-the-month rally (January, February, March and May).  The 9% bounce off the lows between May 20th and May 31st brought the S&P 500 back to breakeven for the month[1].

The Nasdaq continued to underperform in May as investors favor value over growth during periods of higher market volatility.  For the month, the Nasdaq finished down 1.93%, but again, performance was boosted significantly by a 10% rally off the lows towards the end of the month[2].

There was plenty of volatility in the Dow as Amazon, Walmart and Cisco all sold off after posting worse than expected earnings results. [3]  Amazon reported earnings on the last day of April, but the bulk of their stock selling came in May.  However, the month-end 8.5% rally brought the Dow all the way back to finish at breakeven for the month[4].

Small Caps underperformed initially as investors continue to steer clear of higher risk assets, and hedge funds shorted these stocks.  But the month-end rally triggered short-covering and popped the Russell 2000 (small cap index) over 10% off the lows.  This brought the index back to breakeven for the month of May. [5]

The World Index largely followed the path of US equities and dropped early in the month before bouncing back and finishing just above breakeven at 0.15% for May. [6] 

Commodities inflated further in May as ongoing supply chain bottlenecks and the impacts of the Russia-Ukraine war continue to put pressure on commodity prices.  The Commodity Index finished the month +2.77%, as the uptrend in prices held steady. There are some raw goods and materials that are experiencing a drop in prices as the increase in interest rates puts a headwind in front them (copper, corn, soybeans, cocoa and cotton).  However, the most important components of the commodity basket (oil, natural gas and wheat) continue to stubbornly stick near historically high prices. [7] 

Precious metals, on average, dropped about 3% for the month of May, with Gold down -3.61%. [8]    Gold prices are heavily influenced by real rates, or in other words, the inflation-adjusted interest rate.  Both interest rates and inflation have been rising since March, which caused real rates to rise and gold to drop during the same period.  Recently, however, the real rate has been flattening out (since the middle of May).  The consolidation has come from a modest drop in treasury rates, which gave gold a bit of a tailwind.  This real-rate flattening triggered a bounce in gold (2.6% off the May 13 lows), and not only kept the monthly loss to -3.25% (rather than being worse), but also may have put a floor under the 3-month selling/consolidation in gold. [9]

As noted in the previous section, longer dated treasury yields (a measure of interest rates) maintained a steady climb from March through the middle of May.  The key driver of rising yields was the speculation of rate hikes which caused the market to price in higher and higher rates.  The 10-year yield topped out at 3.12% before bond sellers finally relented and some buyers stepped in, which began a modest but steady retreat in interest rates for the rest of May. [10]

Oil prices continue to remain stubbornly high as the combination of energy policies in the U.S. and Europe and the Russia-Ukraine war put a floor under prices.  Adding to the pressure is the recent shift by China back to focusing on growth over inflation[11].  Oil finished up 5.48% on the month[12], and U.S. gasoline prices, on a nationwide average, hit a new record high of $4.60/gallon[13] over Memorial Day weekend.  Gas prices hit new daily record highs 17 times in May, which is a new record for most record highs in one month.  The relentless climb in gas prices is the most significant factor keeping inflation stubbornly high. despite the recent Fed rate hikes. 


The GDP number for the first quarter (Q1) of 2022 was -1.5% on a quarter over quarter (QoQ) basis. [14] This was the first negative GDP print since Q2 2020.  As a reminder, the definition of a recession is two straight quarters of negative GDP (on a QoQ basis).  Note that the final Q2 GDP number will not be announced until the Fall.  Therefore, growth is really about projecting what we think is happening now, and what is likely to happen in the next 1-2 quarters, rather than looking back on 3-month-old data.  Our macro data research provider is currently projecting Q2 GDP to be +2.37% QoQ, so there is still a probability of officially averting a recession.[15]  However, the positive GDP print is hanging by a thread unless gas prices start coming down.  In addition, even with a potential positive Q2 2022 GDP number, the year-over-year (YoY) number is projected to show significant slowing compared to the Q2 2021 GDP number.  This “economic slowing” is a continuation of the slowing we had in Q1 and is the reason why equities have seen so much selling this year. 

Inflation has been a key theme all throughout this market report.  It has been a significant negative catalyst for the global economy for the past several quarters with multiple record prints in the United States, Europe and other parts of the world.  Despite the Fed’s efforts to get prices down[16], the current inflation problems are really a supply issue, and the Russia-Ukraine war is only exacerbating the problem.  Our macro data research provider is currently projecting Q2 2022 CPI to print +7.96% YoY, which is the same CPI number as Q1 2022.[17]  Although this will represent a flattening or slowing in the rate of change of the data, it’s still a very high number overall.  The future projections are for a steady decrease in CPI (inflation) over the next year from +7.96% YoY all the way down to +5.65% YoY.  While this is a significant slowing in the YoY rate of change, once again the issue is that +5.65% is still a very high number overall.   If prices do stay stubbornly high, then it’s unlikely that American (or European) consumers will feel much better, for instance, about gas at $4.20/gallon instead of $4.60/gallon.[18]  Therefore, inflation is an issue that may be with us for an extended period of time, and will likely continue to act as a severe headwind to consumer confidence, consumer spending, corporate profit margins and economic growth. [19]

All Weather

What if everything you have been told about long-term investing and diversification has been a lie?  While we have been in a 40-year bull market and economic growth cycle, it has been fueled by increasing debt and artificially low interest rates that has forced almost everyone to shift from being savers to investors.[20]

Since the 1970 Inflation and Rates have been falling creating the perfect environment for the 60/40 stock bond portfolio.[21]

This has led to a common theme of investing for the long term as the market just goes up and to the right if you stay invested.  While this is true over the long run, the timing of when you pick up your chips and get ready to retire or begin to live off of your investments really matters.[22]

The role of central banks have played through fiscal policy and Quantitative Easing has created an environment over the last 20 years where a traditional saver has been forced to become an investor taking on more risk to keep up with sustainable rates of return. This is illustrated by showing investors progression of to achieve 7.5% rate of return. from 1995 – 2015 [23]

The problem is that most investors believe they are diversified if they hold a mix of US Equities, Foreign Equities, Private Equity, Venture Capital, Real Estate and Bonds.  All of these assets are very dependent on a positive economic and credit market cycle.  When times are good, they will all typically go up together. [24]

However, when times are bad, they also all go down together.  If the timing of the downturns coincides with the start of your use of your capital for income, the ability to recover from the drawdown that occurs becomes very difficult.  Therefore, it is our philosophy that you need to combine a good offense with a good defense by adding asset classes to your portfolio that do well when your traditional assets do poorly.  These include assets like Long Volatility, Commodity Trend, and Gold. [25]

There are 4 main macro environments, Growth, decline, deflation and inflation. Different asset classes historically have done better or worse depending on the macro environment.

What is macro economic environment?

A macro environment is the condition that exists in the economy as a whole, rather than in a particular sector or region. In general, the macro environment includes trends in the gross domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy.[26]

To be truly diversified we want assets the do well in each environment, Stocks do better in growth, bonds do better in deflation, long volatility does better in decline and Commodity trends do better in inflationary times. [27]

By combining all of these aspects into your investing strategy you can achieve diversification across each quadrant and macro environment  [28]

What this creates is a team of offensive and defensing players changing positions and the economic conditions change. For example in a growth cycle stock would be playing offense and long volatility would be playing defense but in a declining environment Long volatility would be playing offense helping to ballast the portfolio while stocks struggle. If all asset classes over time have positive expected rated of return, we can hypothetically illustrate (shown above) how the offensive and defensive assets work together to create a less volatile strategy.   [29]


  1. The market bounced back to breakeven for the month of May.
  2. Inflation, and especially oil and natural gas prices remain at historically high levels, which will keep pressure on the Fed to continue raising rates.
  3. Ongoing market volatility in 2022 highlights the importance of combining a good offense with a good defense in your portfolio.

We hope you have enjoyed getting a deeper look into our investment research and look forward to providing this to you each quarter going forward. Thank you from the entire Konvergent Team!

[1] Slide 2: S&P 500
[2] Slide 3: NASDAQ
[3] Amazon (, Walmart (
Cisco (
[4] Slide 4: Dow Jones
[5] Slide 5: Small Caps
[6] Slide 6: World Stock Market Index
[7] Slide 7: Commodities
[8] Slide 8: Gold
[9] Gold: Real rates will again matter (
[10] Slide 9: Yields
[11] China’s shift to growth ( )
[12] Slide 10: Oil Spikes on Russia Headlines
[13] Gas Prices (
[14] GDP (Second Estimate) & Corporate Profits (Preliminary), First Quarter 2022 (
[15] Slide 12: GDP
[16] Slide 13: Rate Hikes
[17] Slide 14: Inflation
[18] What Is Holding Back U.S. Oil Production?
[19] Slide 15: The Consumer
[20] Slide 17: How to Manage Wealth in Every Economic Environment
[21] Slide 18: The set up: Falling Rates and Inflation
[22] Slide 19: Stock Index Down/Flat Periods
[23] Slide 20: Forced up the Risk Curve
[24] Slide 21: Offense Only
[25] Slide 22: A Good Offense Combined With a Good Defense
[26] Slide 23: Why True Diversification Matters
[27] Slide 24: Why True Diversification Matters
[28] Slide 25: An Ensemble Approach
[29] Slide 26: Should Everything In Your Portfolio Go Up At The Same Time