Exhausted by the market noise causing these turbulent times? What can you do?
Let’s start here:
- What happened?
- What’s to come?
- What should you do?
As of June 30, 2022, the S&P 500 had its worst start to the year since 1970. These detrimental headwinds pushed stocks and bonds sharply lower through the first six months of the year:
- High inflation
- Sharply rising interest rates
- Growing recession risks
- Extreme geopolitical uncertainty
Combine these factors with additional market noise:
- The Fed raised interest rates at the fastest pace in decades
- China, the world’s second-largest economy, effectively shut down
- The Russia-Ukraine war raged on.
While the volatility and declines are unsettling (and painful), the S&P 500 now sits at more historically attractive valuation levels. And with negative uncertainty priced into the market, positive surprises are a possibility as we move forward in 2022.
Inflation & Fed Rate Hikes
With the Fed’s announcement to increase rates on July 27th, 2022, we hope to see a definitive peak in inflationary pressures in the coming months. If so, it’s likely the Federal Reserve will take a “less hawkish” approach and hike rates less than feared. This may prove to be a materially positive catalyst for markets.
The Chinese economic shutdown increased global recession concerns. If Chinese economic activity can return to normal, that will be a positive development for global economic growth. Meanwhile, U.S. stocks are no longer richly valued. This provides positive opportunities for investment for the rest of the year.
It’s worth noting that a “recession” is determined by the National Bureau of Economic Reserarch. While Q2 2022 marks the second consecutive quarterly contraction (which is the definition of a recession), other factors include unemployment, retail sales, and other measures of income and manufacturing. We anticipate further commentary on this front.
The human tragedy in Ukraine continues with no end in sight. Still, the conflict has not expanded beyond Ukraine’s borders. Many analysts believe that some sort of conflict resolution can be reached. Moreover, any truce between Russia and Ukraine will likely reduce commodity prices, and global recession fears should decline as a result.
The markets experienced numerous macro-and micro-economic headwinds through the first six months of the year. These factors pummeled asset prices. However, the market already partially priced negative sentiment into stocks and bonds. This creates an opportunity for potential positive surprises.
Although the conglomerate of headwinds is unprecedented, let’s look at what history shows us. When the S&P is down 15%+ the first half of the year, in all five instances since 1932 the market registered a positive return for the final six months of those years.
However, we know what worked in the past likely won’t cooperate in the future. We will continue to be vigilant to additional risks impacting our investment portfolios. Still, market history provides clear examples that positive surprises may occur even in challenging markets such as this. More importantly, through each of those declines, markets eventually recouped the losses and moved to considerable new highs. All bear markets come to an end.
At Gunder, we understand the evolving risks facing both the markets and the economy and are committed to helping our clients effectively navigate this complex investment environment. Successful investing is a marathon, not a sprint. Even extended bouts of volatility like we’ve experienced over the past six months are unlikely to alter a diversified investment approach.
It’s critical to stay invested, remain patient, and stick to the plan. If your goals have changed, it may be worth a conversation! Reach out to us today. If you are feeling emotional about the recent market declines and want to discuss your personal situation further, we’re always available to help.
All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services