Over the last week, the markets have delivered extreme volatility, with the S&P 500 Index approaching bear market territory as it flirts with a peak to trough decline of almost 20%. The concerns that have contributed to the poor start are well-known. Historically high inflation, supply chains disruptions, China in another lockdown, geopolitical concerns, an aggressive Federal Reserve Bank (Fed) rate hiking campaign, and soaring yields have all contributed to the worries. Also, concerns about a possible economic recession are spreading after the 1.4% decline in gross domestic product (GDP) during the first quarter, and in light of major retailers’ expectations of a softening in consumer demand for goods and services.
As we move into summer, we remain optimistic that more sunshine could be coming. Yes, the GDP report showed an economy that contracted in the first quarter, but that was mainly due to drags on inventory and trade, while more important parts of the economy like consumer spending, housing, and private sector investment all accelerated compared to the fourth quarter. We expect GDP to grow approximately 3% this year and avoid a recession thanks to strong consumer balance sheets and a healthy corporate earnings backdrop.
Inflation could be nearing a peak, offering a potential driver for improved confidence in the second half of this year. Used car and truck prices have come down significantly over the past two months, while shipping costs have also dropped nicely. These two bits of data suggest inflation may be normalizing, even if it may take a while for it to get back to the Fed’s targeted level. Add in supply chain resolution and the potential for a ceasefire in Ukraine easing some the upward pressure on commodities, and perhaps the Fed will be able to tame inflation with a somewhat less aggressive series of rate hikes than the bond market is currently pricing in.
As uncomfortable as this year has been, this action is actually about average. Midterm election years tend to be even more volatile, correcting more than 17% on average, but the index rebounded 32% on average in the 12 months following those midterm year lows. Lastly, the last 21 times the S&P 500 has been down double-digits since 1980, the index rallied back to end the year positive 12 times. Don’t give up hope yet.
The investing climate is quite challenging, but based on historical trends, we believe patience may be rewarded. Even if there may be some downside in the short term, consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations, and current levels may end up being an attractive entry point for suitable investors.
Now more than ever, we believe our work is to provide support and guidance to navigate the markets with consideration to your personal goals and income needs. While we can’t control the markets, we can control the time, care, and attention we bring to you and your family’s financial goals.
As always, it is a pleasure to work with you.