First Half Of 2022 Was the Worst For Stocks Since 1970. It Will Get Worse.

How bad was the first half of 2022 for stocks? It was the worst first half since 1970, long before most of today’s investors were even born.

In the first six months of 2022, the S&P 500 was down 21%, the Dow Jones was down 15%, and the NASDAQ Composite was down 30%. That’s bear market territory for two of the three major indices, with the Dow in correction territory and not far from the bear.

Those poor stock market results come alongside higher interest rates, higher inflation, and much higher oil prices. Here’s a good article on all these trends with a valuable historical perspective.

Of course, investors know what they’ve been through this year. What investors want to know is… where do we go from here? The first half is not always a prelude to the second half.

In 1970, the market turned around in the second half and performed well. Still, that was the beginning of a tumultuous decade.

There was another major market crash in 1974 and another in 1981. There were three recessions (1974, 1980, and 1981) in just seven years. And that was the decade when inflation spun out of control, hitting 13.5% by 1980.

Right now, the outlook for the second half of 2022 is actually worse than the first half. The U.S. is probably in a recession today. U.S. GDP declined 1.6% (annualized) in the first quarter, and the Atlanta Fed GDP forecast for the second quarter shows a 2.1% decline. If that second-quarter figure holds (we won’t have official data until late July), that would meet the technical definition of a recession as two consecutive quarters of declining GDP.

Inflation is currently 8.6% on a year-over-year basis. The Fed has raised interest rates from 0.0% to 1.50% since March and is on track to raise rates to 2.75% by September, with more rate hikes in November and December. That’s the fastest tempo of interest rate hikes since Paul Volcker in the early 1980s.

The Fed wants to stop inflation, but the way they do that is to destroy demand. That will make the nascent recession even worse.

Still, the Fed may fail to stop inflation even while causing a recession. That’s because the inflation is coming from the supply side in food and energy and not from wage demands. Supply chain dysfunction grows worse, both because of continual COVID lockdowns in China and the impact on food and energy exports from the War in Ukraine. Neither phenomenon will be over soon.

On top of these fundamental headwinds, there may be a new global liquidity crisis underway, as indicated by inverted yield curves in Treasury notes and Eurodollar futures. Hope springs eternal. Investors hope that the second half of 2022 will undo the damage suffered so far. Hard data on interest rates, inflation, and the supply chain suggest otherwise.

Corporate leaders and institutional fiduciaries looking to incorporate state of the art predictive analytics to their risk mitigation and strategic analysis should click the link to learn more about Raven Predictive Analytics®.