LOOKING BEYOND A TURBULENT FIRST HALF OF 2022

The Oxford English Dictionary defines turbulent as “characterized by conflict, disorder, or confusion; not controlled by calm.” There seems no better description of the first half to 2022 given the crosscurrent of interrelated issues including economic uncertainty, persistent inflation build, Federal Reserve monetary policy, and strife in Ukraine.

A turbulent first half of 2022

The Oxford English Dictionary defines turbulent as “characterized by conflict, disorder, or confusion; not controlled by calm.” There seems no better description of the first half to 2022 given the crosscurrent of interrelated issues including economic uncertainty, persistent inflation build, Federal Reserve monetary policy, and strife in Ukraine. Accordingly, this near perfect storm of convergent events contributed to provide an unstable environment for investor assets. Every measured asset class of stock, bonds, and commodities suffered negative returns in Q2 2022. Other than oil and a handful of commodities, all these same asset classes were down year to date. This mid-year commentary will describe StrongBox Wealth’s perspective around the multi-faceted storm at hand, as well as important historical context illustrating multiple silver linings that may set the stage for a degree of calm in the second half.

All-weather portfolios

For most investors, an all-weather approach should govern portfolio allocation in alignment with one’s risk tolerance and form the basis of a long-term investment discipline. Unfortunately, that prescribed discipline can be quite challenging to adhere to when we experience severe price volatility, as it requires perseverance and objective frames of reference in the face of market value decline. It is tempting to otherwise conclude “it is different this time” regarding the historical ability of markets to consistently steady and rebound over time.
To level set context, through 2021 the S&P 500 index had gained about 10.5% on average annually since it was introduced in 1957. The index has fared much better than that over the past decade, returning about 14.7% on average annually. Given the recent years of outperformance relative to long-term historical averages, it seems reasonable that the markets were due to regress. However, when risk presents itself in absolute form as reflected in diminished investment values, price fluctuation should rarely give cause to changing one’s long-term risk tolerance associated with asset accumulation methodology, retirement design, or strategic investment income plans that were formulated during less volatile times and with intentional anticipation to endure through both good and bad market environments.

Bear market

Quick take: The S&P 500 index had its worst first half of the year performance since 1970, down -20.58%, technically qualifying as a bear market. A positive aspect to know is that since 1950 every bear market decline has been associated with a following year significant recovery in prices.
For the first half of 2020, we experienced a price decline of -20.58% on the S&P 500 index, excluding dividends, to result in the worst performance since the first half of 1970. A bear market describes a condition in which “securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.” With the S&P 500 index as our proxy, we are in a technical bear market. The average length of a bear market is around 9.5 months and occurs on average about 3.5 years apart from each other. Of the 26 bear markets that have occurred since 1928, 15 have also seen recessions while 11 have not. Since April 1947, there have been 14 bear markets, ranging from 1 month to 1.7 years, and in severity from -20.6% to -51.9% price decline in the S&P 500 index.

A forward looking silver lining

Despite the current year to date decline, the following chart illustrates a pattern that has been repeated since 1950 where each time a 20%+ market decline has occurred, the associated following year bounce back has been significant.

Consumer sentiment

Consumer sentiment is at very amplified negative levels. Consumer sentiment is a useful economic indicator that statistically measures how optimistic consumers feel about their finances and state of the economy. This data gauges how much demand there is for goods and services. Given that roughly 70% of our economy is driven by consumption, it is clearly important to first stabilize broad consumer “opinion” then move on to improving overall sentiment levels.

A forward looking silver lining
It is compelling to review historical stock market returns after inflection points in consumer sentiment. Expanding on the previous chart, this second consumer sentiment chart shows the subsequent 12 month S&P 500 return from 8 prior sentiment peaks has averaged 4.1%. However, the subsequent 12 month S&P 500 return from 8 prior sentiment troughs averaged… 


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