Investors are saying goodbye to the first half of 2022 after the U.S. stock market suffered its worst performance in 50 years, driven by inflation and recession fears.
In the first six months of 2022, the Dow Jones Industrial Average tumbled 15.3 percent. The Nasdaq Composite Index, which slipped into a bear market this past spring, lost almost 30 percent. The S&P 500 fell 20.6 percent, sliding into bearish territory last month.
The last time the S&P 500 saw a first-half decline of that magnitude was in 1970, during the presidency of Richard Nixon. The index’s loss so far this year places it fourth-worst on record for the first half, just behind losses of 45.4 percent in 1932, 23.5 percent in 1962, and 21.0 percent in 1970.
Other assets also slipped in the first half. Gold prices declined 1.36 percent to $1,805 an ounce, while silver plunged 13.6 percent to $20.165 per ounce. Copper also recorded a significant slump so far this year, plummeting 17.29 percent to $3.688 a pound.
But not everything was down during this span. Crude oil rallied 40.5 percent, natural gas advanced 58 percent, and gasoline surged 60.51 percent. Crops have also made gains so far this year, with soybeans, corn, and wheat up 7.7 percent, 4.3 percent, and 15.35 percent, respectively.
The greenback has been one of the best-performing assets in global currency markets. The U.S. Dollar Index (DXY), which gauges the buck against a basket of currencies, has soared more than 9 percent to 104.69.
Investment experts suggest that the primary cause of the market turmoil has been inflation, resulting in multiple consequences, from the Federal Reserve raising interest rates to lackluster economic data.
Reading the Second Half
Now that the first six months are in the rearview mirror, what are institutional investors and market analysts anticipating in the second half? While inflation will continue to play a key role in the second half of 2022, the potential for recession continues to grow as a major concern for investors.
Following the 8.6 percent consumer price index (CPI) reading, the increasing base case for many investors is a recession. The key debate is when an economic downturn could unfold, how long it will last, and how severe it could be when it strikes.
A recent CNBC CFO Council survey discovered that 68 percent of chief financial officers expect a recession to occur in the first half of next year. Nobody thinks the United States will avert two straight quarters of negative growth, the study found.
In addition, a separate Financial Times poll conducted last month with the Initiative on Global Markets at the University of Chicago Booth’s School of Business indicates that 79 percent of economists believe a recession will happen in 2023.
Mimi Duff, an investment strategist at GenTrust, is placing the odds of a recession at greater than 50 percent, according to a recent research note.
The Bureau of Economic Analysis’s final first-quarter GDP reading was a decrease of 1.6 percent, slightly worse than the second estimate of negative 1.5 percent. Moreover, the Atlanta Fed Bank’s GDPNow model suggests the second quarter will contract by 1 percent, down from the previous 0.3 percent growth rate projection.
“Investors are mainly concerned about a potential recession as the Federal Reserve keeps raising interest rates,” Luzi Ann Javier, a markets analyst at the financial services firm Finder, told The Epoch Times.
“Another factor is the persistently high inflation. Together, these two are hurting consumer spending and dimming the outlook for corporate profits. These are what have been driving the negative sentiment in the stock market and that will continue until the economic outlook brightens.”
The Federal Open Market Committee is widely expected to raise the benchmark Fed funds rate by 75 basis points at this month’s policy meeting. Expectations are still mixed for the September meeting, although the CME FedWatch Tool suggests the market is penciling in a 50-basis-point rate increase.
According to Matt DeLong, the chief technology officer at Real Life Trading, the Fed’s balance sheet reduction could play a significant role in the financial markets in coming months.
The central bank confirmed that it would start unwinding its roughly $9 trillion balance sheet by $47.5 billion per month onto public markets.
“At that rate, it will be June 2026 before the Fed’s balance sheet is at pre-pandemic levels; that’s four years from now,” he told The Epoch Times. “The last time the Fed decreased their balance sheet like this, it was at a level of $2 trillion in 2007–2009 and it only was able to offload 20 percent of what was planned, we are currently at 400 percent more assets close to $9 trillion, not $2 trillion.”
While recession fears are making the headlines, stagflation—a blend of surging inflation and stagnant economic growth—is also popping up amid revised downward earnings and rising inventories, Duff added.
That said, earnings could be a notable factor for the rest of the year, says Tom Lauman, the head of investment strategy at Wealthplicity, an investment education firm.
Whether stocks are overvalued or undervalued will depend on inflation and earnings, Lauman noted.
“The case for continued sell-off will be made if earnings consistently erode over the next two quarterly reporting seasons. Mild softness in results will buoy stock prices which are building in greater risks,” Lauman told The Epoch Times.
Many investors’ favorite stocks over the past couple years have experienced an intense year-to-date selloff: Amazon has slumped 37 percent, Netflix has tumbled 70 percent, Tesla has declined 43 percent, Disney has dropped nearly 40 percent, and Apple has slid 25 percent.
In addition, many stocks that were hyped by social media during a meme frenzy in 2021 have fallen considerably, too. AMC shares are down 48 percent, GameStop is down 20 percent, and BlackBerry has tumbled 42 percent.
Overall, the U.S. stock market could be bracing for a multi-year bear market, with so-called dead cat bounces and extended selloffs the new normal for now, according to Steven Jon Kaplan, the CEO at True Contrarian Investments. A dead cat bounce refers to a false rise in the price of a security or asset following a lengthy decline.
He told The Epoch Times that the current bear market will likely claw away more of the pandemic-era gains in 2022.
“My guess is that the second half of 2022 will consist of three pieces: 1) a modest rebound in July which might end in July or early August; 2) a dramatic decline which will lead to an important intermediate-term bottom this autumn; and 3) a year-end rally which should continue into some part of 2023,” he said.
In terms of what investors can do or look into, Eric Compton, a Morningstar strategist, contends that many bank stocks are presently undervalued, such as U.S. Bankcorp, JPMorgan Chase, and Bank of America.
Meanwhile, Kaplan finds gold and silver mining stocks to be attractive, including GDXJ, a fund of mid-cap gold mining and silver mining securities.
However, should price inflation start to show signs of slowing, a broad basket of stocks could begin to do well again, according to Nancy Tengler, chief investment officer and CEO of Laffer Tengler Investments.
But the public isn’t anticipating a rally in the equities arena over the next 12 months, with only 36 percent of Americans thinking U.S. stock prices will be higher next year, according to the recent Fed Bank of New York’s Survey of Consumer Expectations.