This blog serves as a follow up to our previously released Q2 Investment Themes, as well as an update on what we are seeing and our current outlook.

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

  1. May inflation readings triggered a June market selloff as the market shifted to a more hawkish Fed outlook.  This is what we anticipated in last month’s Market Update.  And right no cue, the Fed hiked rates a historic 75bp.
  2. Agriculture commodities have begun to price in economic slowing, but oil prices high on an absolute basis.  In addition, although the rate of change of inflation (commodity prices) will show deceleration from May to June, the absolute numbers are still historically high and a serious drag on consumer spending and corporate margins.
  3. An economic recession is possible this year as GDP has already printed a negative number in the second quarter.  The combination of high inflation and the beginning of recessionary conditions has created a negative impact on the wealth effect and crushed consumer confidence and consumer spending, which will likely lead to a corporate earnings recession this year.


The stock market continued to experience volatility in the second quarter, largely driving by inflation. Equities across the board experienced a rough quarter in Q2 with the three major indices ending the quarter down double digits. The Dow which did the best due to being a more defensive index still ended down 12.11%. On the other side, the tech heavy NASDAQ took the largest hit ending down 22.67%. Overall, it was a challenging quarter for equities. [1]

During the last three to four years, bonds have historically been a safe haven when equities struggle. This was not the case this quarter as we’ve been in more of a rising-rate period. The 20 Year Treasury Bond ended the quarter down 13.26%. While shorter term treasuries were not as bad, the 1-3 Year Treasury Bond ended down 4.76% on the quarter. Being in a diversified 60/40 or a heavy bond portfolio, didn’t provide the typical relief they have in the past.[2]

Both Global and Emerging Markets did not do well during the quarter with both ending the quarter down over 10%. Emerging Markets which ended down 11.58%, did see a divergence from World Markets, down 15.79%, which is mainly attributed to China. While the rest of the world is in a tightening mode, China is lowering interest rates and providing stimulus. We expect this to continue into Q3.[3]

An area that’s done well in this inflationary environment is commodities which has been a top preforming category for most of the year. It continued this quarter until June when commodities give back all the gains on the quarter and finished down at 1.29%. [4]

Gold saw a steady decline through the quarter ending down 6.05% on the quarter. Relative performance wise, keeping some gold in your portfolio would have limited the drop in your portfolio compared to a heavy equity one. [5]

The financial markets continued pricing in a shift away from an economy with accelerating growth that we saw for much of last year.  While we had been expecting this shift to occur, the outbreak of war Ukraine, Rate hikes and record inflation served as catalyst for more downside pressure. In addition, commentary from Fed leaders throughout the quarter forced markets to price in an increasing quantity of rate hikes for 2022. As a result, the transition to the pricing in of a slowing economy occurred quicker than anticipated and caused a rapid correction in equities.

The market outlook for the third quarter of 2022 is now centered on decelerating growth and the likely beginning of decelerating inflation. With the Fed forced to tighten while the economy faces steep YoY comparisons, the setup for the market is challenging. Because of this, we enter Q3 with a defensive outlook, but will continue to monitor the signals and be prepared to adjust accordingly.

Macro Economic Process

Our process for model management is now expanded and based a few key areas and comes from research from multiple research groups.  One of the major shifts was incorporating more macro economic data into our decision making.  At a macro level, the economy is viewed through the lens of growth or decline and inflation or deflation.  The research we receive from Hedgeye maps where we are currently and then where we are heading to probabilistically based on the data coming in. This is how we get the various quad outlooks that we refer to in our material.

The Quads – The quads are all about mapping the economic environment we are currently in, as well as using predictive data to identify the probable outcome for future quarters based on an analysis of Economic Growth, Inflation and Government Policy.  The quads are broken down like this:

Quad 1 – Economic Growth Accelerating, Inflation Slowing

Quad 2 – Economic Growth Accelerating, Inflation Accelerating

Quad 3 – Economic Growth Slowing, Inflation Accelerating

Quad 4 – Economic Growth Slowing, Inflation Slowing

By understanding which Quad we are in, we can identify what asset classes have historically worked and which might struggle.


Inflation, once again, has been a significant negative catalyst for the global economy for the past several quarters, and even with a rate-of-change deceleration, the high absolute numbers are still a problem for people in the United States and around the world.  The net result will be an ongoing drag on the global economy.  Looking forward, our research provider projects the final Q2 2022 CPI print to be +8.47% year over year (YoY), which is up from the +7.96% estimate last month. It also represents a new quarterly high in inflation, and potentially the peak in the inflation cycle.  The future projections are for a steady decrease in CPI (inflation) over the next year from +8.47% YoY all the way down to +6.14% YoY. [6]

The final GDP print for the first quarter (Q1) of 2022 was -1.6% on a quarter over quarter (QoQ) basis.[7]  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.  Our macro data research provider is currently projecting Q2 GDP to be +1.98% QoQ, down from the +2.37% estimate last month, so there is still a probability of officially averting a recession. This “economic slowing” is a continuation of the slowing we had in Q1 and is the reason why equities have seen significant selling in the first half of 2022.[8]

In June the Federal Reserve stated that overall economic activity is picking up[9]. We aren’t seeing that in the data we look at. The impact of sharply higher rates, slowing growth and stubbornly high inflation is having a negative impact across multiple sectors.  We are not seeing any meaningful pickup of economic activity; consumer discretionary spending is down[10], service activity is down[11], business confidence is down[12] and home sales are decreasing.[13]

In the manufacturing space, we are starting to see inventory levels pickup as supply chain issues reduce. The problem is we are seeing the price of products going up to all-time highs. Due to the increased inflation, we are anticipating stores needing to decrease their prices to attract consumers. This decrease working with the increase in pricing which will have an impact on margins.[14]

In the lowest levels of income, we are seeing the increase in excess savings that occurred during the pandemic fall off and now be lower than pre-pandemic levels.[15] This comes at a time when we are seeing all-time highs occur in month over month increases of consumer credit.[16] The increase in consumer credit levels is being met with multi-decade high credit card interest rates.[17] This can filter up into the other income levels which can put more pressure on the economy.


  1. The market sold off in anticipation of higher-than-expected inflation readings and then the ensuing 75bp Fed rate hike.
  2. Inflation came down at the end of June just in time to close the books on a “better-than-expected” CPI report to be released in July.  However, any bullish sentiment from a “deceleration” in inflation prices will be mitigated by the high absolute levels of those prices.
  3. The pressure on the American consumer is just beginning to show up in the data.  The domino effect through the economy will likely get worse over the next several months, which will keep pressure on the financial markets.  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 3: Stocks Continue to Struggle
[2] Slide 4: Bonds Drop on Spike in Rates
[3] Slide 5: Global vs Emerging Market Equities
[4] Slide 6: Commodities Give it Back
[5] Slide 7: Metals Continue Their Slide
[6] Slide 10: Growth and Inflation
[8] Slide 11: Growth and Inflation
[10] Slide 12: Consumer Discretionary Spending
[11] Slide 13: Services Activity
[12] Slide 14: Business Confidence
[13] Slide 15: Existing Home Sales
[14] Slide 16: Margin Pressure
[15] Slide 17: Excess Savings
[16] Slide 18: Revolving Credit
[17] Slide 19: Revolving Credit Rates