Repositioning and repricing for the future is what the market is in a constant process of doing. Reacting and adjusting to inflation, economic, and corporate data along with digesting the corresponding FED policy responses has all lead to significant volatility this year. In fact, the level of this volatility has been nothing less than record breaking so far this year. As they say, records are meant to be broken, but we obviously prefer not to be breaking such ominous new ground.
On January 3rd, the S&P 500 topped out at 4796. As of the close of the second quarter, the S&P 500 stood unsteadily around 3785. This represents a 21% retracement from its high-water mark at the beginning of the year. On June 13th, the S&P 500 (and several broad market indices) officially entered bear market territory (as represented by a decline in value of 20% or more). Now add that fixed income is having its worst year ever and it won’t surprise you to hear that 2022 is off to one of the most difficult starts we have seen in decades.
No one knows when the markets will find a bottom. The history of previous bear markets suggests we have experienced a significant portion of this current downturn. Several prominent strategists suggest that the markets’ recovery phase will begin when FED policy pivots from being hawkish to a more dovish tone. But as long as the FED’s hand is forced to aggressively address inflation, the markets will continue to experience volatility.
FED Chair Jerome Powell and most FED governors are committed to their goal of controlling inflation. With the benefit of hindsight, it is easy to suggest the FED was late with its policy shift, perhaps hesitant to slow an economic recovery still dealing with the lingering effects of a global pandemic. Nonetheless, the combination of enormous fiscal stimulus that rapidly increased money supply (up 40% last year), stubbornly persistent and wide spread supply chain disruptions, and strong consumer demand have all led to price increases. Consumer demand for goods and services has never been the issue here. Rather, this has been a supply side problem.
What in our daily lives is not more expensive right now? And in some instances, meaningfully more expensive. For how long and by how much does the FED need to raise rates to slow the economy in its effort to slow inflation? We at BaldwinClarke feel a lot of demand destruction has already occurred. Consumer confidence and expenditure measures show that reality (University of Michigan’s Surveys of Consumers sentiment index posted a 50 in June, the lowest level on record). Generally speaking, inflation may have peaked back in March, but heightened fuel and food costs are still hampering and adjusting consumer buying behavior. The hope is that the FED might still be able to pull off a soft landing, but early indicators are showing a recession, by technical definitions, may now be upon us.
Over the decades that we have worked with our clients, one thing is certain: market bottoms will eventually be found. Once established, invariably longer and substantial recovery periods will commence. Our financial system is not broken. The destruction of value experienced thus far in 2022 sets the table for valuation creation going forward. Returns 1 to 2 years out from current levels will likely reward investors. Subtle portfolio shifts and rebalancing efforts at this time will prove prudent. Although pessimism is currently high, investing in quality companies at substantially reduced prices has often produced very attractive results. As always, please reach out to us if you have any questions. We are here, available and focused on helping.
Managing Director Investment Advisory
Baldwin & Clarke Advisory Services, LLC