In 1970, Simon & Garfunkel’s “Bridge Over Troubled Water” topped Billboard’s Hot 100 chart. 52 years later, many investors are weary as portfolios are feeling small following the worst first half year for U.S. stocks since 1970. This year, the S&P 500 finished the first half with a 20.58% decline, sending the index into bear market territory and posting the worst January to June slump since 1970. The declines for the Dow and the Nasdaq were even worse. The NASDAQ reported its biggest half-year decline on record and the Dow reported its worst decline, in percentage terms, since 1962.
After seeing the highest inflation in decades, elevated oil prices, rising interest rates, international military activity, and supply chain issues, economists are predicting a recession. To combat the inflationary pressures, the Fed is employing monetary policy to cool the economy. However, the cost of monetary constriction is rising interest rates which will slow borrowing, spending, and economic growth. Therefore, if the economy slows too fast and interest rates continues to rise, the likelihood of a recession increases significantly and the capital markets will remain extremely volatile for the second half of 2022 and possibly into 2023. At times, the first half of 2022 has felt a little like the 1970s. Before you pull out your bellbottoms and platform shoes, here are some things to consider as a bridge over the troubles that has plagued the markets thus far in 2022.
Since 1957, the S&P 500 index has fallen 20% or more from an all-time high nine times. Eight times out of these nine occurrences, the index has been higher three years later and returned 29% on average. Also, one year after a 20% decline from an all-time high, the S&P 500 returned 15% on average since 1957. Then the only instance of negative performance after 3-years from this sample, related to the 2001 dot com crash, turned positive in year 4.
While it is impossible to know exactly when the markets will recover, stocks have historically recovered very sharply in the years following a downturn. Furthermore, remaining invested after a bear market will drastically increase the likelihood that a portfolio participates in the subsequent positive returns. Corrections and bear markets are not easy to withstand but they are a natural part of the ebb and flow of the stock market and are necessary for long-term growth. Over the past 50 years, all 28 corrections have been more than erased by the ensuing bull market rally. In fact, over the same time period, the S&P 500 has spent about three times as many days rallying compared to the days it’s spent in correction.
With having virtually no areas of the markets to hide from the troubles of 2022, it may be difficult to think about the long-term benefits of staying invested. However, now more than ever it is imperative to stay disciplined. Ensure that your investment portfolio is well diversified and rebalance as needed. Financial professionals and clients should have ongoing conversations about any material life changes that may impact investment goals and objectives. With economists calling for a recession, market volatility is expected for the remainder of 2022 into 2023. There may be more investment troubles ahead. The best bridge or plan of action for uncertainty in the markets is to have an investment plan, review your investment plan periodically, and staying the course. First State Trust Company has many partners whose investment management and financial planning expertise can assist in these volatile times. For additional information or help finding the partner that is right for you, feel free to contact me at email@example.com.
Michael A. Burns, MBA
Assistant Vice President / Investment Officer
Investing is not risk free and there are no guarantees. You should carefully consider your risk tolerance, time horizon, and financial objectives before making investment decisions. By investing, you run the risk of losing money or losing buying power (where your money does not grow as fast as the cost of living). Risk can be classified into many different categories, and by knowing those categories you can better manage expectations and avoid or reduce certain kinds of risk.
The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only. FSTC does not offer tax, legal, or investment advice, professional counsel should be sought for tax or legal advice.