The books are now closed for the first half of 2022, and investors are struggling to find a reason to be optimistic. The S&P 500 closed out the first half of the year down 20% from its January open. That makes it the S&P’s worst start to a year since 1970. The bond market hasn’t fared much better. Investment grade bonds posted an 11% drop since the start of the year, making it the worst start on record for these bonds. It’s very clear at this point that the US has some economic challenges ahead. However, the most dangerous phrase that can be mentioned around the economic watercooler is – “this time feels different”.
"This time feels different"
Americans are dealing with the highest levels of inflation we’ve seen in decades. To sum up the primary causes in a single sentence would be to say – Post-pandemic manufacturing and supply chain challenges paired with low interest rates and high consumer demand has caused prices to rise exponentially in a short period. When inflation is this high companies struggle to keep up with their previous levels of growth and profitability. Hence why we see stock prices falling across the board. With the Fed now aggressively raising interest rates, investors are anxiously awaiting monthly inflation and economic data to determine if the pricing pressures are beginning to ease.
The overarching view among investors has been that to date the Fed has been chasing its own tail. Many view the Fed as having been reactive so far which has allowed high inflation to continue. It is likely for this reason that we saw the Fed raise rates by 0.75% this past meeting, as opposed to the previous 0.50% hikes signaling to investors that the Fed will be taking a more proactive approach going forward. The unfortunate truth behind interest rate increases is that they are intentionally meant to slow down the economy. In essence, the Fed is attempting to slow an already slowing economy to bring inflation back down. The trick will be to do so without over tightening and causing a recession. This is what investors are calling a “soft landing”, and this maneuver will take time and precision.
After what has been a historic bull market run throughout the 2010’s, investors are for the first time in a long time beginning to feel the discomfort of a bear market. This discomfort was happily forgotten for the better part of the past decade, but now that it’s back we will undoubtedly start to hear that “this time feels different.”
Keeping a Level Head
The outlook in the back half of the year is likely to remain more negative than positive until the data suggests otherwise. The key thing to remember throughout a bear market is that these are not unprecedented times. When investors see significant contraction in their portfolio a common reaction tends to be – “this time feels different”, implying that these market conditions have never occurred before. When in fact this time is very likely not different from one or several previous economic cycles.
Nonetheless, this common investor fear can drive us towards panic and irrational behavior. The absolute worst, yet common, reaction to a bear market is locking in losses by panic selling. Remember the market has always been cyclical, and will continue to be cyclical. Yes, each previous cycle has differed in length and circumstance, but the cyclical nature of the market has remained constant. Not only that, but with each previous cycle the booms have always eventually outpaced the busts. This time will be no different.
