CWG Investment Committee: First Half 2022 - Bear Market
Inflation and interest rates up, stocks and bonds down; that was the story in the first six months of 2022. The stock market had its worst start of a year since 1970. The bond market suffered its worst start of a year ever, according to the Wall Street Journal.
Stocks as measured by the S&P 500 Index were down 21%. Bonds as measured by the Core U.S. Aggregate Bond Index were -11%. The 20+ year Treasury Bond ETF (TLT) ended -22% YTD.
Ten of eleven sectors of the S&P 500 Index sank, with the exception being energy. Ten-year US Treasury bonds went out with a 3.03 % yield having hit 3.48% in the week before the end of Q2. The Gold Trust ETF (IAU) was positive all year but lost value in eight of the last nine sessions in June, ending down 0.2%, all data according to Bloomberg.
CPI peaked at 8.6%, a 40-year high. 30-year mortgages exceeded 6% briefly, more than doubling the rate from the year before. Home affordability therefore plummeted, combining high home prices with high mortgage rates.
Euro area inflation reached 8.6% in June. The continent shook from the Russian invasion of Ukraine and poor energy policies that left the West at the mercy of the Russian Bear.
The current administration in Washington faces scrutiny over gas prices. Politicians generally receive too much blame, and credit, for the economy. However, the over-prioritization of green initiatives and concurrent regulatory pressure on energy companies has lead us to this moment of sky-high gas prices. Their embrace of unsustainable temporary fixes like suspending the federal gas-tax, does not bode well for an economy trying to stave off a recession.
Federal Reserve Chairman Powell finally woke up to the inflation reality and vows to bring it back to his 2% target. Don't hold your breath for that to happen any time soon.
Google searches with the word “Recession” have now have overtaken “Inflation” as our attention turns to an immanent contraction in economic activity.
The Atlanta Fed forecasts -1.0% for Q2 GDP. We saw -1.6% GDP in Q1, which was explained-away by the economic gurus as a recalibrating. They now see a rising probability of what people on Main Street are experiencing in their actual lives. Clearly the consumer has taken a big hit from rising rents, food prices and gas prices nearly doubled.
Disparate voices like Professor Jeremy Seigal of Wharton and Cathie Wood from Ark Funds say we have entered a recession already.
Sentiment from AAII Investor Surveys reached cycle lows on June 22nd with 18.2% Bulls and 59.3 % Bears for the next six-month outlook.
How things will turn out this year is far from certain, with the Fed still expected by markets to raise rates seven more times. There are positive catalysts out there that could help the market in the back half of the year.
First, history is on our side. After previous 20% drops in the first half of a year since 1932, stocks have rallied each time to post positive returns in the final six months of those years, according to FactSet data.
Also, equity markets are vulnerable to good news right now. Fear is high, sentiment and expectations are low. Economic data has an opportunity to stabilize or help markets in the coming months.
However, until we see a recession in our midst and earnings estimates moving downward from current expectations we will err on the side of caution. Once the smoke clears, or panic sets in, a better entry point for both bonds and equity investments will present itself.
We wish you a wonderful July 4 celebration!
Doug Coppola - Executive Director & Investment Committee Chairman
Steve Lindgren - Chief Investment Officer & Partner