The first six months of 2022 were a dreadful time for most stock and bond investors. Stocks, as measured by the S&P 500 Index, lost over 20% this year, placing us in a bear market for the first time since the financial crisis of late 2007 to early 2009.
Bond yields have risen sharply since the first of this year. When bond yields rise, prices fall and vice-versa. So, bonds have not been a safe haven for investors this year as the stock market entered the first bear market in 13 years.
As a result, the traditional 60%/40% stock/bond portfolio got hammered in the first half of this year as you can see below. In fact, you could argue we just lived through one of the worst 6-month periods EVER for stocks and bonds collectively.
The 6-month returns for a 60/40 portfolio were in the bottom 2% of rolling returns going back to 1926. This means 98% of the time, returns have been better than what we just lived through.
It was also just the 4th time over the past 100 years that stocks and bonds were down two quarters in a row at the same time. The last time US stocks and intermediate-term bonds were both down two quarters in a row occurred in the first two 3-month periods in 1974.
Inflation was soaring back then, just as it is today, so both of these time frames had an even worse experience on a real return basis.
Today, only 22.8% of investors are bullish on stocks, according to the American Association of Independent Investors (AAII) and Consensus, Inc., two widely-followed gauges of investor sentiment. Nearly half of all investors polled by these services are bearish.
Americans are about as negative as they get on the direction of the country in general. Only 18% believe the country is headed in the right direction, while 77% believe the country is on the wrong track, according to the latest poll by Rasmussen as of June 30.
It continues to baffle me why people are so negative following the strongest year of economic growth in decades as the economy rebounded from the Covid recession, but I’ve written at length about that in recent weeks.
Yet it is clear most Americans are in a foul mood. Believers in so-called “contrary opinion theory” think conditions now are ripe for a turnaround. They could be right.
In any event, our next definitive indicator will come out on July 28th when the Commerce Department releases its first estimate of 2Q GDP growth. I’ve also written at length about that in Forecasts & Trends the last two weeks, but there is one new worrisome development.
The Atlanta Fed’s GDPNow indicator just plunged into negative territory in the last week of June to a reading of -2.1% as you can see below.
The latest plunge in GDPNow in the week of June 27 to July 1 is the largest weekly decline I have seen. Obviously, the 13 indicators the Fed watches to create the GDPNow number must have turned sharply lower for that week.
The question is, what happens going forward? The answer, of course, is no one knows. Will stocks and bonds continue to decline in lockstep for a third quarter? It’s only happened once before in the last hundred years – in the last nine months of 1931.
Fisher Investments recently crunched the first-half versus second-half equity returns for every year from 1926 through 2021. What they found is the correlation between first-half and second-half returns is quite low at 0.099. The correlation coefficient ranges from 1.0 to -1.0, and a reading of 0.0 means no relationship. The current reading of 0.099 is very close to zero.
The other question is, has the stock market already priced in a recession for later this year or next year? I would say it has, at least in part. I absolutely believe the fear of a recession just ahead has weighed on stock prices. That plus the inflation rate climbing to the highest level in 40 years and the Fed rate hikes which have followed and will likely continue to pressure stocks for the near-term at least. I believe it is clear that all these factors have weighed on stock and bond prices this year.
Stock and bond prices have reversed higher in the last week or so. Does this mean we’ve seen the bottom? No one knows. But I’ll go out on a limb and predict that stock prices will be higher than they are today by the end of this year. We’ll see.
I’ll leave it there for today.
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