Not much went right for investment markets and the economy in the first half of 2022. Most stock indexes fell by 20% or more and the S&P 500 experienced its worst first half of a year since 1970. US consumer inflation rose above 8% to its highest level in 40 years. The US Federal Reserve Bank vowed to aggressively fight inflation and then proved it by raising the Fed funds interest rate by 0.75% in June, the biggest increase since 1994. Rising interest rates caused even secure US Treasury bonds to drop in value by 10% on average.
Given this backdrop, it is not surprising that expectations for an economic recession have grown in recent weeks. First quarter US GDP declined by 1.6%, partially due to a swelling trade deficit. A decline in second quarter GDP would confirm we are already in a recession. Consumer spending averages about 70% of US economic activity and Americans with pent up demand have been spending. However, there are signs that high prices are wearing down shoppers and the University of Michigan Consumer Sentiment Index hit an all-time low in June.
And yet, household net worth remained close to all-time highs, thanks in part to rising home values. And the value of the S&P 500 on June 30 was about 16% higher than its value on December 31, 2019, not including dividends received. In other words, after suffering through a global pandemic, the US stock market is still well above where it was before COVID-19 hit our country. With a healthy employment market and solid cash balances, the US economy as a whole is stronger than consumer sentiment would suggest.
Investor behavior tends to focus on recent results and projects those trends forward. Six months ago, stocks were near all-time highs and interest rates were low. And we expected our investment portfolios would continue to move higher. But economic forces shifted dramatically in the first half of 2022, with the costs of basic needs like energy, food and shelter rising sharply. Investors are now worried that inflation will continue to impact their lives and portfolio values.
For investors who have retired recently or are thinking about retiring in the next year or two, this year’s investment results have certainly caused some indigestion. However, it's important to remember that investing is a long-term process, and we need to be prepared for the inevitable bear markets. In 2020, markets bounced back quickly from the sharp bear market induced by COVID-19. The current downturn feels like it could linger, but eventually the investment markets and the economy will stabilize and long-term growth trends will return.
This article was authored by Christopher Borden, a financial advisor and Managing Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or email@example.com
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Talk to your financial advisor before making any investing decisions.
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks.
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