When the stock market closed for trading on June 30, 2022, it marked the worst first-half performance for S&P 500 since 1970, finishing down 20.58%. For the Dow Jones Industrial Average, this is the worst start since 1962. Meanwhile, the tech-heavy Nasdaq Composite’s 29.5% first-half plunge was its worst first half ever. It goes without saying that living through historic events like these is not fun.
By the numbers, we finished the month officially in a bear market, which is what a market decline is called once it crosses the 20% threshold. In all, there have been 28 bear markets since 1928. This one marks 29. Now, the good news is that if you are reading this, you have survived thus far. The better news is there will be good days ahead if history serves as any sort of decent guide (and we believe it does).
The June release of the May PCE index, which captures inflation (or deflation) across a wide range of consumer expenses and changes in consumer behavior, was unchanged compared to April, but excluding energy and food, we saw a decrease of 0.2%. While food and fuel are still the major culprits for most of the inflation we are seeing, an interesting plot twist to the inflation narrative also took hold in June.
In the last month, on the fear of a coming recession, the price of oil has declined roughly 20%. Prices for grains have also fallen considerably. Meanwhile, the price of Palm Oil, the world’s most widely used cooking oil, has also declined markedly, to the lowest level in over a year. Wheat futures are currently off more than 30% from their March highs. Corn and soybean futures have given up all their 2022 gains.
The irony of this development is that if these commodities do continue their decline or stay at these levels, this will lessen the inflationary pressure we’ve been experiencing, which has been pushing the markets lower and been the major driver of the recession fears we’re seeing. What a wild time to be alive.
The State of the Market
With the worst first half in the rearview mirror, everyone is holding their breath about what the second half of the year will look like. We would certainly advise you to take a longer view than the next six months with your wealth, but using history as our guide does provide some interesting waypoints to consider nonetheless.
First, if we look at other periods where the market has dropped 15%+ in a quarter, since WW2, we can see that 7 out of the last 8 times, the next quarter finished higher. Furthermore, the next half and next year finished universally higher (often markedly higher). While one might counter this by saying that there is so much that could go wrong from here, that was certainly true at every other depressing point markets had declined this much, and yet in many cases markets did better moving forward climbing those walls of worries.
Following prior 20%+ two-quarter drops, the S&P’s performance is even more pronounced, averaging a gain of 8.51% in the next quarter, a gain of 21.47% over the next half-year, and a gain of 31.36% over the next year.
But, what about in recessionary periods? Recently, the Atlanta Fed’s GDPNow gauge estimated the second quarter is running at -2.1%, which would technically indicate our economy is already in a recession if you define a recession solely as 2 quarters of negative real growth. But, what you will notice when we, again, use the wider lens of history, the S&P 500 in 11 out of the last 12 recessions, was higher one year later, the exception being in the wake of the dot-com bubble bursting. And, three and five years later it was positive 12 out of the last 12 recessions, and markedly higher.
While every recession is different, the one thing that’s very different about where we are now is consumers and business balance sheets are incredibly strong going into this period of contraction, stronger than any other time in history.
From the Wall Street Journal, “Americans’ checking-account balances jumped after they got their pandemic stimulus payments, bank executives have said. While customers have spent some of that money, balances still remain markedly above where they were in 2019, said Chris Wheat, co-president of the JPMorgan Chase Institute, the bank’s in-house think tank. At the end of March, balances of families with the lowest incomes were 65% above 2019 levels. JPMorgan Chief Executive Jamie Dimon last month said U.S. consumers still had between six and nine months of spending power remaining in their bank accounts.” Meanwhile, businesses are sitting on a record $4 trillion dollars of cash.
There’s no question that things have slowed down, layoffs have occurred, more will likely occur, and earnings for some companies will be revised lower. But, while our economic output is indeed lower, all of this is also happening while the jobs market, still, is incredibly strong (3.6% unemployment rate) and consumer spending has also remained robust. This Friday will offer us the opportunity to take account of what the jobs market looks like with an updated unemployment number. But, even if the number is weaker than expected, this too, will lower future inflationary expectations which has, again, been the main driver of lower equity prices. These developments are unlike any previous recession we’ve experienced.
Of course, it’s too soon to tell. Other shocks could hit our economy, like an escalation of the war in Ukraine, commodities could resume their upward trend, and the Federal Reserve could raise rates too aggressively and push us into a deeper recession and putting a bigger chill on the real estate market than most expect, but right now, the record-breaking damage to the market we’ve just witnessed is in the rearview mirror and history shows us that the road forward is anything but certain doom.
In March of 2020, in the wake of the shutdown of our economy with COVID, we recorded the shortest bear market in history (33 days), and it’s quite possible if the consumer does hold up through this volatile period, and the jobs market is able to absorb the layoffs we’ve seen, this recession might also mark the shallowest recession ever recorded. Because, if we’ve learned anything over these last number of years, anything is possible.
To be clear, on a technical basis, the market is still in a downtrend, with the US Total Stock Market needing to rally roughly 11% from here to reestablish its support trendline, but fundamentally, it is our opinion that while we acknowledge the broad market is still fragile, there are a number of individual companies trading at historically low valuations even if we do factor in a significant recession in the days to come, and valuations do still matter.
Looking forward, in less than two weeks, company earnings reports for the second quarter will be released and will offer us a much clearer picture of how companies have been doing and provide the best view of what they expect for the rest of the year. Until then, we remain cautious but believe further patience is warranted. Put another way, with regard to the road forward, as Warren Buffett likes to say, investing is simple, but not easy.
That said, we are monitoring the markets and portfolios and we continue to be ready to make changes as necessary. As always, if you have any questions about your portfolio, feel free to contact us anytime. We’re here for you.