2020 In the Rearview
The first six months of 2022 saw the S&P 500 decline 21% from its all-time closing high at 4,796 on January 3 to a closing low of 3785 on June 30.
More noteworthy even than the extent of the decline was its gathering violence: in mid-June, the market ran off a streak of five out of seven trading days on which 90% of S&P 500 component stocks closed lower. This is one-sided negativity on a historic scale.
Now in July, the correction may not last. Neither might the threat of recession. Or inflation. Our best guess, based on TIPS bond yields, is that inflation will run in the mid 2% range over the next 5-10 years. The rest of this year doesn’t look great, though, and above average inflation could last into next year. No one knows.
In recent conversations several clients made comments that, generally stated, said what they are seeing now in the market and maybe politically was completely expected, but they would greatly value our insight into what was going to happen next. This is called hindsight bias. It is the knew-it-all-along feeling we get when looking at something that just recently happened. No one knew two years ago when Covid started that the aggregate of political and monetary actions would leave us stuffed with cash, inflated prices and with full employment, yet agonizing about the threat of recession. Some expected maybe one of those things, but not all of them.
As financial planners we think everywhere and always, inflation is the enemy. It takes no forecasting to maintain this position. If it takes a recession to stop prices from rising, so be it. Our suspicion all along is that recession is a possibility in the short term, but an inevitability in the long term. As it is a natural part of the business cycle, recession, like winter, a recession performs a valuable function. It can’t always be summer (whew, good thing because it would be uncomfortably hot in at these temperatures).
Our job is to stay sharp and wait for some mathematical signal to put the portfolio back where it belongs. At the moment, bond yields are our tea leaves. When things change, we will be in touch. So far, nothing we see has changed.