Welcome to the second half of 2022. It’s been a very ”fascinating” ride, hasn’t it? Stocks fell for another straight quarter, with the MSCI All Country World IMI Index dropping nearly 16% and major indices entering bear market territory in June. Inflation fears dominated headlines. US stocks were particularly hard hit, dropping 16.7%, with international markets, especially emerging markets, faring a bit “better” at -12.1%. Aside from China, which was up 3.3% for the quarter, all developed and emerging markets posted negative returns. Even bonds generated losses for the quarter, down over 6%.
What on earth will happen next? We wish I had a crystal ball to tell us! If anything, the past quarter has demonstrated how even familiar shores can shape-shift on us with each tide.
Here are just a few of the ways in which the financial landscape has been disorienting lately. The changeability offers yet another reason to keep your investments immersed in the market’s proverbial ocean, instead of trying to chase its restless waves.
Safe Harbors and Risky Seas: Diversifying your portfolio across stocks and bonds is a bedrock strategy for pursuing the stock market’s higher expected long-term returns, while using bonds as a safe haven to temper the periodic plummets. Lately however, there have been fewer opportunities for either strong returns or safe harbors. Most stock and bond asset classes have dropped in tandem year to date, which is extremely rare!
Beauties and Beasts: Even within the stock market, some seemingly invincible perennial Wall Street darlings such as Facebook’s parent company Meta (META) and Netflix (NFLX) have stumbled so significantly, they’ve actually become value stocks. The rapid turning of these tech titans’ tides proves once again, there is no such thing as a sure bet in the stock-picking lottery, and we always need to stay diversified!
Dollars to Donuts: Despite plenty of challenges at home and abroad, the U.S. dollar has been one of the few assets on the rise lately. As one market analyst observed, “In real terms, with high inflation, you would expect the dollar to depreciate in the long run—that is what the theory says—but the picture is tricky.” Global investors have been hoarding the stuff lately, perceiving it as a relatively safe harbor compared to other currencies (including cryptocurrency).
In short, there are currently a lot of mixed signals out there, and we haven’t even scratched the surface of them all. To see past the immediate “fog of battle” confusion that is going on today, let’s take a wider view:
Relative Scales: For sure, bond returns have steeply declined in reaction to the Federal Reserve’s ambitious rate increases. The Wall Street Journal recently reported this has been the worst bond market in 180 years. But while stocks and bonds are both in the red, there’s ample evidence suggesting their overall risk/return roles remain unchanged. For example, citing a 1.2% second quarter loss for its US 1-5 Year Core Bond Index, Morningstar reported, “Bonds with less sensitivity to changes in interest rates held up relatively well.” Compare that to second quarter’s stock market losses that ranged from –9.44% for Morningstar’s value stock index to –25.33% for growth stocks.
Potential Value: Speaking of value stocks, they’ve also held up relatively well compared to growth stocks and remain underpriced in 2022. This bodes well for investors who are committed to maintaining a long-term tilt toward value stocks, as our portfolios are. As AQR’s Cliff Asness observed in a Wall Street Journal (WSJ) interview, “People like me, both for legal and for honesty reasons, should never use the word guarantee, and I won’t. … But I’ve never been more excited about value.”
Sudden Moves: Underperforming asset classes often surge surprisingly, just when we’re most convinced they never will. For example, a WSJ quarter-end analysis looked at the two most recent years in which the S&P 500 lost more in the first half of the year than the 21% it’s dropped this year to date. That was in 1962 and 1970, and both times, the market rebounded in the second half of the year by 15% and 27%, respectively. This by no means suggests we should expect the same in 2022, but neither does it negate that as a plausible possibility!
It's important to keep in mind that most of the time the stock market is focusing not on this week’s inflation number or next week’s industrial production figure. Those are backward looking and only tell us where we have been. The stock market doesn’t give a whit about where we’ve been or even where we are today; that’s old news (but unfortunately most investors behave as if that is all that matters! The stock markets instead are focused on what corporate profit levels will be six-twelve months in the future. This is exactly why stocks will usually break out of a negative pattern without warning while the news of the day is still very negative, catching the mom and pop investors flat footed. As a result, they miss out on the early jump in prices which can often be quite violent on the upside!
Historical Perspective: Take a look at these charts that track stock market growth over time, and compares its periodic downturns to its stronger (and much longer lasting) growth spurts. These visuals illustrate why we encourage you to remain as fully invested, but as widely and globally diversified as possible. No investment strategy can possibly shield you from every sling and arrow the market throws our way. But we believe our approach best positions you to seize the remarkable recoveries as they occur, while avoiding a measure of the near-term volatility along the way.
From our perspective, any other tactic seems unlikely to optimize your financial bottom line. That said, those who can’t stop themselves from trying to get ahead by reacting to recent news events can at least know they’re helping big banks and brokerages thrive. As one reporter recently observed: “Banks make money on the way up and on the way down through trading desks that work the connections between buyers and sellers. JPMorgan Chase & Co. and Citigroup Inc. both expect the second quarter to be among their best ever for trading revenue.”
Whose best interests would you rather serve: your own or your broker’s? Assuming it’s your own, we’re right there with you. Please let us know if we can answer any questions about current market conditions, or anything else that may be on your mind.
Richard and Angela