Wall Street set records earlier this year, but none were good.
The economy is on the verge of recession, hit by high inflation and rising interest rates, eating up salaries, reducing consumer confidence and leading to business shrinkage. The market is down because it is wobbling.
Six months to Thursday was the worst stock market in the first half of the year since 1970. The S & P 500, which is the basis of many equity portfolios and retirement accounts, peaked in early January and has fallen nearly 21% in the last six months.
This year, sales fell sharply in all sectors except energy. Bellweathers such as Apple, Disney, JPMorgan Chase and Target all outperform the entire market.
And that’s just part of this year’s horror story for investors and businesses.
Bonds, which are expected to provide investors with lower but more stable returns, have also been terrible for six months. This is probably even more worrisome about economic conditions, as bonds are more sensitive to economic conditions than stocks, reflecting inflation and changes in interest rates more directly.
An index that tracks 10-year government bonds, which is a benchmark for borrowing costs for mortgages, business loans and many other types of debt, has fallen by about 10% in price. Deutsche Bank analysts had to go back to the second half of the 18th century to discover that the performance of the first half of comparable bonds was deteriorating.
Jim Reed, head of Deutsche Bank’s credit strategy and thematic research, said:
According to Victoria Greene, Chief Investment Officer of G Squared Private Wealth, it probably feels “nothing worked” for the average investor with a diversified equity and fixed income portfolio. This is especially true for investors who bought at the beginning of the year when the market was more vibrant. “The venerable 60-40 portfolio hasn’t held up at all,” said Green, of the 60% equity and 40% fixed income that financial advisers have traditionally offered to investors to protect them from downdrafts. Mentioned the combination.
Stubborn high inflation, which has run at the fastest pace in more than 40 years since the beginning of this year and has been exacerbated by soaring food and energy prices due to the war in Ukraine, has reduced the rate of return on businesses. .. This happened in addition to the perpetual supply chain growls that make it difficult for businesses to process customer orders and manage inventory.
Rising prices are also damaging consumer spending, which is the foundation of the US economy. May spending increased at the slowest pace of the year, and spending on commodities with the fastest rising prices declined, according to a Thursday government report. According to another recent report, consumer spending earlier this year rose more slowly than previously estimated. There are also rising gauges that track consumer expectations of how fast prices will rise in the future, a sign of concern that inflation could settle in the economy.
A few weeks ago the S & P 500 fell into a bear market as investors reassessed its outlook. This is a rare and harsh sign of pessimism that defines Wall Street as falling 20% from its recent peak. The index has fallen in 10 of the last 12 weeks, with occasional rebounds rapidly intensifying as new concerns hit the market. As a result, companies feared listing, and initial public offerings in the first half of the year were carried out at the slowest pace since 2009 in the aftermath of the financial crisis.
Stock market conditions
The decline in the stock market this year was painful. And it is still difficult to predict what lies ahead for the future.
The Federal Reserve’s determination to curb inflation by raising interest rates is a major contributor to the current market turmoil. Federal Reserve Chair Jerome H. Powell said Wednesday that the central bank’s efforts to combat inflation “are very likely to be somewhat painful.”
Rising borrowing costs cool the economy by lowering demand, which reduces pressure on prices. The sharply high bond yields, which move in the opposite direction of prices, have caused losses to the portfolio of bond investors.
And if the fight against inflation in the FRB demands a very high rise in interest rates and the economy goes into recession, this limits the ability of companies to hire new staff, spend on new projects and pay off debt. Are stocks and bonds.
Assets that were thought to be unaffected by these trends also provide few shelters. Bitcoin, the largest cryptocurrency, has fallen by more than 50% this year.
Investigating financial debris raises the question: how bad can it be?
In the coming weeks, companies will begin reporting their earnings for the second quarter and update their financial position. These reports scrutinize the signs that the volatile economy may be turning worse, which influences buying and selling decisions.
According to Steve Sosnick, chief strategist at Interactive Brokers, just as important as the company reveals about the latest quarter is how things are being shaped for the upcoming quarter.
“In general, expectations remain very high,” he said. It’s a sign that the situation may not be as bad as horror, or that they are set to disappoint. Analysts’ forecasts of profits for companies such as Apple and JPMorgan Chase have been relatively stable over the past month.
Andy Sieg, president of Merrill Lynch Wealth Management, said he did not see the significant increase in trading activity between clients as expected during times of turmoil. However, over the past year, the number of clients seeking conversations about financial planning has increased significantly. He explained that this is a “constructive” approach to dealing with the recession.
“The more volatile the market, the higher the emotions,” Sieg said. “It’s a normal human reaction to the environment in which we live.”
Even if corporate earnings and economic news aren’t as bad as fear, it may take some time for the depressed mood to change. And many consider it another false dawn to mark a decisive turning point. “Usually when the world still feels scary, the bear market changes,” said Green of G Squared Private Wealth.
“There is only one real bottom,” said Sosnick of Interactive Brokers. “That’s really the last turning point, so it’s not clear to me if we’re still seeing a situation showing one of them.”
For Deutsche Bank Reed, “many depend on the timing of the recession,” he said. According to his research, the decline in stock prices so far would be an extreme outlier without a recession.
Economists are increasing the likelihood that the US economy will be in recession, and the shrinking economy is even more in line with the magnitude of the market decline that Reed expects. He considers the stock market to be “plausible” to fall 35-40% from its January peak. In other words, the current decline is almost half done.
Ben Casselman When Janna Smiarek Report that contributed.
