It is painful to open your investment report and see the losses for the first six months of the year. How bad were the first six months?
- The -19.96% return for the S&P 500 was the worst start to a year since 1970.
- The -10.35% return for the Aggregate Bond Index was the worst start to a year since ….. before I can find data. I have read that the year 1788 had a worse six-month period. (George Washington was president.)
- For a 60% stock / 40% bond portfolio only two six-month periods in the past 42 years had lower returns. The six month periods ended December 2008 and March 2009 had a 60% / 40% portfolio loss worse than the period ended June 2022.
Knowing all of this bad news, when you look at your accounts and see the negative numbers, the losses seem worse and much more personal. It is hard to think of the long term and feel confident in the old saying “time in the market is more important than timing the market”.
I had a client ask to please do something to stop the losses. The reality is that at some point (a week from now, six months from now, or a year from now) history has shown that the market will increase again . Losses will turn into gains. If you stop the losses now by selling, you will miss the coming rebound. The losses will be locked in and you will never recover your former balances.
How Your Portfolio Compares
Based on the index returns for the S&P 500, the Aggregate Bond Index, and the Russell 1000 Growth Index, your year to date returns (losses) for a 50% stock / 50% bond portfolio would be around (15%). For a 60% stock / 40% bond portfolio, your losses would be around (16%). If you had a lot of growth funds (Akre Focus, ARKK, T Rowe Price Health), your losses could be in the range of (18%) to (24%).
Economic indicators and sentiment are very mixed right now. Retail sales and employment are up, but purchasing managers’ surveys are down. Inflation is still soaring, and consumer sentiment is tanking. Certain stock market indicators are at levels mostly seen at the end of bear markets, but most “experts” think the market will go lower. We might be already in a recession, or we might be circling for a soft landing.
Given the losses so far in 2022 and the confusing signals in the economy, can you look forward to higher returns in the next few years? We looked at inflationary periods in the past and the stock market returns once “peak inflation” had passed. We considered periods that began with a year that had an inflation average of 5% or more and went back in time 81 years to 1941. Here are the results of our research:
Inflation data sourced from:
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/
In prior inflationary periods, once inflation peaked, stock market returns were strong for many years. Are we near peak inflation now? The decline in oil prices, commodity prices and home prices, suggests that inflation may have peaked. Lower inflation means the Fed could moderate their rate hikes and interest rates could stabilize and even start coming down. Lower interest rates could spark a market rally in the medium term. Even if the market lows do not hold and we have another leg down, positive future stock market returns are looking more likely now that we are (hopefully) near peak inflation.
Disclosures
The information herein has been obtained from sources believed to be reliable, but NBZ does not warrant its completeness or accuracy. Prices, opinions and estimates reflect NBZ’s judgment on the date hereof and are subject to change at any time without notice. Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Any investment strategies presented may not be appropriate for every investor and individual clients should review with their financial advisors the terms and conditions and risk involved with specific products or services. As with all investments, past performance does not indicate future results. Investing involves risk including the potential loss of principal.
NBZ is a registered investment adviser. Registration does not imply a certain level of skill or training. More information about NBZ, including its advisory services and fee schedule, can be found in its Form ADV Part 2 which is available at nbzinvest.com or by calling 865-584-1184. NBZ-22-07
