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So far, 2022 has brought surges in inflation fueled by war in Europe, monetary tightening and slower economic growth. As we pass midyear, many of us may be more than a little ready to forget about the first half. Our 2022 theme of downshifting, or slowing of growth, is certainly coming to fruition.
Markets in a Minute: Mid-Year Review & Outlook
There is no sugarcoating market performance in the first half of 2022. With the ongoing war in Ukraine, China’s zero-Covid policy, domestic political disputes, upcoming elections, and of course, inflation concerns, asset classes nearly across the board declined.
For many Americans, it feels as if prices are rising on everything, except for their paychecks. At the same time, the negative performance in stocks and bonds is hurting their nest eggs. It’s no wonder that consumer confidence is at a several-year low.
But there is a silver lining. Markets look forward, pricing in what investors think will be, not what they are. As such, current stock and bond prices already reflect a significant economic slowdown, if not a full-on recession. With that, stock valuations and bond yields are more attractive than they’ve been in quite some time.
Turmoil like this calls for courage. Courage to remember that, though they may be painful, bear markets do end, and without warning. And when a bear market ends, a bull market ensues and assets rise.
Here are a few highlights from the second quarter:
Q2 2022 Index Returns
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. Source: Kestra Investment Management with data from FactSet. Index proxies: Bloomberg Municipal Bond Index, Bloomberg US AGG Bond Index, S&P US TIPS, ICE BofA US High Yield, S&P 500, MSCI World ex USA, MSCI EM, Dow Jones US Select REIT, Dow Jones Global X US & Bloomberg Commodity Index. Data as of July 15, 2022.
As inflationary pressures continued to grow, the Federal Reserve hiked interest rates much more aggressively, effectively slamming on the economic brakes.
With consumer prices soaring by the fastest pace in decades, will inflation ever come down? There are some signs that price increases will cool later this year.
5 Year Forward Inflation Expectation Rate
Forward looking estimates may not come to pass. Past performance is no guarantee of future results. Source: Kestra Investment Management, Federal Reserve Bank of St. Louis & FactSet. Data as of June 30, 2022.
Conclusion: There is a Silver Lining
So far this year, the S&P 500 has been in a bear market for about 180 days and has declined by over 20%. While a sharp recession could certainly bring new lows but already lower stock prices and solid earnings have brought equity valuations are below their 25-year average. Bond yields are at more attractive levels than we’ve seen in several years.
Bear markets may be painful to endure, but they don’t live forever. Bull markets on average have lasted almost five times longer than bear markets and they’ve provided much more upside than bear markets provide downside. Most importantly, it’s impossible to know at the time that a bear market has ended. Not being invested during that turn could mean losing out on tremendous upside. If you can maintain the courage to wade through these periods, history suggests you can get excellent returns.
Bear Markets Don’t Live Forever
Forward looking estimates may not come to pass. Past performance is no guarantee of future results. Source: Kestra Investment Management, Charles Schwab & FactSet. Data as of April 04, 2022.
Want to learn more? Check out previous issues of Markets in a Minute.
Stock Performance in Previous Tightening Cycles
What’s Next for the Housing Market
Which Stock-Market Sectors Shine when Inflation is High
Why Bonds Play an Important Role in Portfolios
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Private Wealth Services, LLC, Kestra Investment Services, LLC, Kestra Investment Management, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC does not offer tax or legal advice.