The Good, The Bad, And The Ugly
Matthew Iantosca, CFP® AEP®
Managing Partner & Director of Wealth Management
We officially wrapped up the first half of the year, and it was one for the record books.
First, the bad and ugly.
We just experienced the worst start to a year for the S&P 500 since 1970 and the worst first-half performance for the Nasdaq in history. A challenging market was expected coming into 2022 after a strong recovery in 2020 and 2021, but things escalated quickly when inflation intensified to levels not seen in more than 40 years. Besides the large amount of economic stimulus injected into the system over the last few years, inflation was boosted by worker shortages, continued congestion in global supply chains, and especially the war in Ukraine. One of the primary tools that the Fed uses to fight inflation is increasing short-term interest rates. We saw a .75% increase in the Fed funds rate in June and expect another similar increase in July as well. The goal of this is to slow down demand by increasing borrowing costs, slowly increasing unemployment to build a healthier labor market, and ultimately creating price stability and stopping inflation in its tracks. We do see signs that this is working although a bit slower than everyone had hoped.
Now, onto the good/glass half full view. ("The Good")
Investors are always surprised by how well the market performs during turbulent economic times. During these times I am reminded of the saying that “markets climb a wall of worry”, and I would not be surprised to see something similar going into the rest of the year. Markets tend to be great discounters of future events and prices in bad news first. Then when a positive view can be seen down the road (even if not immediately), asset prices tend to react quickly, which is what has happened historically during other bear markets. Those that stay the course and/or acted opportunistically tend to be greatly rewarded over time.
As we continue to expect the economy and markets to experience some headwinds, it is helpful to look at similar market pull-backs for a guide of what could be in store for the rest of the year. Past performance is not indicative of future results, but it can be helpful to put things into perspective. Historically when the S&P 500 experiences a quarterly drop of 15% or greater like we just saw in Q2, the S&P 500 has averaged a gain of 6.22% in the next quarter, a gain of 15.15% over the next half year, and a gain of 26.07% over the next year. Building upon that, when we see a 20%+ drop over two quarters as we have seen for the start of this year, the S&P 500 has averaged a gain of 8.51% in the next quarter, a gain of 21.47% over the next half-year, and a gain of 31.36% over the next year. See the below chart from Bespoke investments and LPL.
Although no one knows when the exact bottom will happen, I do believe that a fair amount of bad news has already been priced into stocks and bonds. We continue to look for new opportunities, and tax-loss harvest positions to help offset future gains and rebalance client portfolios. These times are never fun to go through, but investors who stay invested and even add new money during these downturns, have historically fared well.