Stocks continued their historic decline in the second quarter. The S&P 500 realized its worst first-half performance since 1970 as headwinds of high inflation and sharply rising interest rates combined with growing recession risks and geopolitical unrest rocked the markets. The declines are understandable considering inflation reached a 40-year high, the Federal Reserve raised interest rates at the fastest pace in decades, the Russia-Ukraine war raged on, and China, the world’s second-largest economy, effectively shut down.
While the volatility and market declines of the first six months of 2022 have been unsettling, the S&P 500 now sits at more historically attractive valuation levels. At current prices, several negativities have been priced into the market, opening the possibility of positive surprises as we move forward in 2022.
Regarding inflation and Fed rate hikes, markets have aggressively priced in stubbornly high inflation and numerous additional rate hikes from the Federal Reserve between now and early 2023. If we see a definitive peak in inflationary pressures in the coming months, then it’s likely the Federal Reserve will back off and increase rates less than currently feared, which could be a materially positive catalyst for markets.
On economic growth, the Chinese economic shutdown increased global recession concerns. This sharp drop in economic activity not only increased the chances of a global recession but also compounded global supply chain problems (Shanghai, the world’s busiest port, operated far below capacity during the lockdowns). If Chinese economic activity can return to normal, it will be a positive development for global economic growth. Meanwhile, recession fears are rising in the U.S., but stocks are no longer richly valued, and therefore, aren’t as susceptible to an economic slowdown as they were earlier this year.
The human tragedy in Ukraine continues with no end in sight, but the conflict has not expanded beyond Ukraine’s borders and many analysts believe that some sort of conflict resolution can be reached in the coming months. Any sort of a truce between Russia and Ukraine will likely reduce commodity prices, providing much necessary relief at the gas pumps. Global recession fears should also decline as a result.
The bottom line is that the markets have experienced numerous macro-and micro-economic headwinds through the first six months of the year and they have legitimately pressured asset prices. But the sentiment is very negative now. Lots of potential “bad news” has been at least partially priced into stocks and bonds at these levels, again creating the opportunity for potential positive surprises.
To that point…five times since 1932, the S&P 500 has declined more than 15% through the first six months of the year. In all of those instances the index notched a positive return for the final six months of those years. The S&P declined 17.4% in the second quarter and is down 20% at the half-year point, compared with the Nasdaq down nearly 30%.
Of course, past performance is not necessarily indicative of future results and we will continue to be vigilant to additional risks to portfolios. With that said, market history provides a clear example that positive surprises can and have occurred, even in difficult markets such as this. More importantly, through each of those declines the markets eventually recouped the losses and moved to considerable new highs.
At Primoris Wealth Advisors, we understand the risks facing both the markets and the economy and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even extended bouts of volatility like we have experienced over the past six months are unlikely to alter a diversified approach intended to meet your long-term investment goals.
Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personalized portfolio based on your financial position, risk tolerance, and investment timeline.
Rest assured, we are here to help you successfully navigate this market environment. Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.