As we head into the second half of 2022, I wanted to take a moment to look back on what we have come through. For starters, the first 6 months of 2022 were the worst January-June period for the stock market since 1970. On top of that, US Treasury bonds, which are usually a safe haven in times of stock declines, lost about 11% in the first half, according to an ICE Bank of America index that tracks intermediate-term Treasury bonds. Let’s don’t forget inflation, which by many measures has risen at its fasted pace in about 40 years. Unfortunately, this all adds up to pretty miserable investment markets so far in 2022.
There really have been few places to hide, since bonds haven’t played their traditional role. Investors in oil and gas-related companies have generally done well, and many chemical and agricultural-related stocks have outperformed. Those are small segments of the investment market, though, so they haven’t been able to keep most investors’ heads above water.
Going forward, we are still in a downtrend for stocks, so I recommend that investors be patient and judicious. I am cautiously optimistic that bond yields have peaked, at least for now. This could translate into higher prices for bonds (bond prices and their yields move inversely), so bonds could finally provide some benefit to portfolios. Additionally, lower yields could translate into lower mortgage rates and other lending rates, making houses more affordable. Unfortunately, if bond yields do head lower, it could be a sign of an impending recession.
I stick by my previous thought that we will have a recession in the US. I expect that it will be next year, although there is a growing chance that it will be this year. The real question is how deep the recession might be. I have the feeling that it will be mild, although it could linger. So, maybe it’s not too painful, it will just take a while to work through the economy.
The Federal Reserve has begun reducing the number of bonds that it owns and is raising short-term interest rates. This is part of their plan to take out some of the frothiness from the investment markets and the economy by controlling inflation and liquidity. In my opinion, this is a condition that they created, along with the help of the US government, by keeping interest rates too low for too long and by issuing too many stimuli. We needed some help getting through COVID, but it is apparent that the government and the Federal Reserve went overboard. All of that stimulus, combined with factory shutdowns and shipping troubles, meant that a lot of money was chasing fewer goods. When that happens, it is very likely that inflation will follow.
So, what’s the playbook for now? I believe that inflation will moderate, and we may even start to see the prices of some goods fall over the next year. I think that the bidding wars we hear of for real estate will stop, and home values will stop increasing at a rapid rate. They may even not rise at all for a while. My understanding is that there is a housing shortage, and, for that reason, I don’t think that we will see home prices crash, although some geographical regions will fare better than others. As I mentioned, I think bond yields may stop rising, and maybe even fall. This would make bonds a good investment.
For stocks, a lot of the damage has been done, but I’d still play defense. If you have a long time horizon, 3 years or more, make a list of great companies that you want to own shares in and buy them when their prices pull back. I think dollar-cost averaging (DCA) makes a lot of sense, a strategy whereby you add money into stocks on a regular basis, say monthly or quarterly. This way, you spread your investments out over a period of time, rather than putting your money to work all at once. This doesn’t ensure a gain or prevent a loss, but it will probably make your investment returns smoother and may keep you from trying to time the market.
If your time horizon is shorter, or if you are prone to get upset by your monthly statements, I’d advise that you be more patient and defensive. Stocks that pay dividends make sense to me since an investor gets the cash flow from dividends, and since regular dividend payment often indicates the financial strength of the company.
Bear markets like the one we are in when the stock market goes down by more than 20%, can be tenacious, and often have big rallies, or upswings, in which investors get fooled into thinking that the bear market is over. These rallies have produced some of the best days in stock market history, so you must be careful about trying to time the market and missing those big rallies. In addition to everything else going on, this is a mid-term election year, and the results of the races could provide a catalyst for stocks to move higher as well as add volatility.
In the end, know that bear markets can and do happen. Bear markets also tend to be common-this is the 3rd one since 2018—and over any given 50-year time frame an investor could expect to see about 14 bear markets. I have attached a nice report from Hartford Funds for your reference. They are no fun but are a necessary part of the cycle. Without bear markets, there would not be bull markets! There is a playbook for dealing with them, so feel free to call your advisor to discuss strategies.
Meanwhile, I hope that you enjoy your summer! It appears that there are lots of vacation trips scheduled, judging by the activity on the highway and at airports. Whether you are traveling or having a “staycation,” I hope you have some time to relax, turn off the TV news, and disconnect for a while.