After three fantastic years of stock market growth, the financial markets diverged mightily in the first half of 2022. Headlines reported it was the worst start to a year since 1962 as both the stock and bond markets declined from their highs. Normally, stocks and bonds do not move with such synchronicity, yet the past couple of years are anything but normal. Uncertainty seems to be the only certainty.
With uncertainty, two financial stories are creating anxiety: inflation and recession. On one hand, it is true that inflation reached a 41-year high in June. Consumers feel gouged by the cost of groceries, gas, and goods. Businesses are still working through supply chain challenges and labor shortages precipitated by the Covid shutdowns. The prospect of a recession is increasing, which typically occurs when Gross Domestic Product declines for two consecutive quarters. On the other hand, consumer demand remains high, and unemployment is very low. High costs show signs of moderating as the Federal Reserve tackles inflation. These positive factors are not typically associated with recessions.
But for a discerning investor, there is more news than just bad news.
Like the stock market, consumer sentiment tends to erode during uncertainty. And it has. In fact, in June 2022, consumer sentiment reached its lowest point in fifty years. Yet, the chart below reveals interesting insight into similar seasons of the past. Noticeably, when consumer sentiment was highest (peaks), the S&P 500 averaged returns of just 4.1% in the next 12 months. But when consumer sentiment hit bottom (troughs), the S&P 500 averaged astonishing returns of 24.9% over the next 12 months.
As economic data gives mixed signals, history shows that markets can skyrocket with surprising swiftness out of troughs in consumer sentiment. It is anyone’s guess if the markets will go down further. We believe in a long view, utilizing broad diversification and rebalancing to assist disciplined investors through volatile seasons. We are always available if you have questions or concerns. We look forward to continuing these conversations with you in your reviews, as we evaluate the current economic environment in relation to your personal financial plan.
- Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index. The figures reflect the reinvestment of dividends, as applicable, but do not reflect the deduction of any fees or expenses, or the deduction of an investment management fee, the incurrence of which would reduce returns. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative index.
- This communication contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially. As such, there is no guarantee that any views and opinions expressed herein will come to pass.
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