The second quarter of 2022 inflicted significant damage on global markets, bringing major equity indices well within the margins of bear market territory. Growth stocks continued to be especially affected by their sensitivity to future earnings expectations and increasing risk premiums. As the quarter progressed, the headwinds of rising inflation and interest rates evolved into fears of more serious economic slowing and growing odds of a global recession ahead. As a result, the quarter experienced a steep ‘everything down’ period for markets, capping off the worst first-half to a year since 1970 (Bloomberg, “The Worst Stock Selloff in Half a Century…,” 7/2/22).

It is important to recall that this was always in the cards to some degree given pandemic-era stimulus and supply chain disruptions. This is not to suggest that the extent of the current market retrace was predictable per se, but simply that the surge in economic-reopening growth was not sustainable with some level of inflation also to be expected. Although consumer sentiment has soured, the jobs market remains robust. Thus, while the odds of ‘technical recession’ have grown (two consecutive quarters of economic contraction), any slowing still looks to be mild. This is critical because it speaks to how close markets may be to ‘the bottom’ within this bear market cycle.

US Large capitalization stocks (‘SPY’ ETF Proxy) retreated -16.1% during Q2, while already beat down emerging market stocks somewhat outperformed on a modest China rebound. Making the year especially hard on traditional portfolios, fixed income securities also added to their annual losses, with the Bloomberg Aggregate Bond (‘AGG’) index down another -4.6%. Importantly, long-term rates are now lower than short-term rates, which often precedes a recession. In contrast, the year’s stalwart in commodities (‘DBC’) managed a slim advance of +2.2%. However, the asset class fell well off their highs last June. This was a positive for inflation concerns, but likewise underscored growing concerns about future growth prospects.

The oft trite statement that earnings will be critical is nevertheless true this quarter given the current precarious market state. Bear markets that are not associated with recessions tend to average peak-to-trough declines in the mid-twenty percent level, while those within recessions average in the mid-thirties (MarketWatch, “How Long Will Stocks Stay in a Bear Market?”, 7/2/22). While we cannot know which case we are in just yet, it is a positive that valuations have moved nearer more normal historical ranges as compared to where they ended last year. Further, past negative first halves have historically ended more positively (Ned Davis Research). For this to occur; however, markets will likely require some catalyst to begin the healing process, whether that be signs of falling inflation, a less hawkish Federal Reserve, or, however unlikely, some resolution to the conflict in eastern Europe. Until such time, we continue to closely monitor client accounts during this volatile period.

Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.