Stock Market 2022 performance to date has entered a territory we have not seen in a long time. We are currently in a technical bear market. A bear market is represented by the S&P 500 and Nasdaq ETF dropping by at least 20%. This contrasts with the V-Shape recovery between March to April 2020. This was during the start of the COVID-19 pandemic.
The main stock market indices, commodity price, and bitcoin performance for the first half of 2022 are shown below. It has been a beatdown first half of the year for nearly everything. Aside from the surge in oil prices this year, the general economy has seen a strong decline across sectors.
|Ticker||YTD to July 1st, 2022 % Change|
|RUT (Small Cap)||-23.05%|
|SPX (S&P 500)||-19.74%|
Stock Market 2022 performance-What led us to this point
What led us to this point, possibly on the precipice of another financial and economy downturn. There are a number of factors that got us here. There are also countless analysts and social media with a variety of reasons and opinions. In our opinion, one has to look back to the October 19th, 1987 stock market crash. That day is known as Black Monday when Dow Jones Index shed 22.6% in a day.
The Federal Reserve led by Alan Greenspan reaffirmed their readiness to support the financial system on October 20th, 1987. Alan later became famous for his Irrational Exuberance phrase. Please see more details in the 1987 Market Crash History. Following FED Chair’s statement, the markets rallied and recovered the loss and more in the subsequent two trading sessions. Arguably, seeds of quantitative easing; adding liquidity to the financial system; lowering interest rates took front and center which evolved into Quantitative Easing that we have come to read/hear from news outlets.
Impact of Quantitative Easing (QE)
What is in it for me with QE? You may have implicitly reaped the benefit of this throughout the last two decades. Since 2008, we went through the subprime loan induced stock market crash of 2008, then credit markets paralysis in 2013. QE motivated banks to lend to consumers and businesses over the last decade at very low-interest rates. This behavior increases consumption, investment, and additional risk-taking by consumers and businesses. An increase in consumption and return to risk-taking for better returns resulted in many asset bubbles since 2008.
QE was further induced during the bleak period when COVID-19 entered our world. We applaud our central bankers who delivered us from the potential abyss and there are no qualms about their actions. History will tell how much more and how much longer they continued with excess QE. A classic example of too much of a (debatable) good thing. Not a direct comparison, but Japan is still recovering from its 1980’s QE and inflated asset prices.
Personally, have had a strong belief that the Covid-19 correction occurred too quickly and the growth recovery in the midst of a global pandemic was too quick and very artificial. We speculate that this “V” shape recovery coupled with the Ukraine war crisis, supply chain issues, and massive inflation in the housing and general economy set up the inevitable turn towards a bear market and as yet to be confirmed, an official recession.
Inflation has gotten out of control and the Fed in the US and the bank of Canada had to increase interest rates drastically to curb inflation which caused a steep decline in the stock market and a noticeable decline in the real estate market as well.
H2 2022 Stock Market and/ Economic Outlook
Interest rates are already set to increase at least 3 more times this year according to the federal reserve and Bank of Canada for their countries respectively.
We can speculate that with the market knowledge about these increases well ahead of time they could possibly be “priced in” to the market. But how many basis points are priced in – if at all – is unknown to investors and analysts alike.
Depending on the next few interest rate hike announcements, if they are less sever there could be relief in the market. If they are more sever there could also be a catastrophic decline down as the bear market continues.
A 1 basis point hike in any of the upcoming meetings would likely cause a steep decline in the market. A 0.75 basis point hike would likely have the market continue its downward trend in the short-term at least. Anything less could be met with a strong recovery and a change of trend to the upside.
Another large factor in the trend of the market for the next half of the year is the upcoming earnings announcements for Q2. The month of July kicks off earnings announcements with a large focus on big tech (Tesla, Google, Apple, etc.) to give guidance for the upcoming month. If their expectations in terms of revenue and growth have stalled or stayed on a good trajectory will be the focus. Good guidance can cause a reversal to the upside and the opposite is true with bad guidance.
Finally, we hope the Ukraine conflict will subside and humanity prevails- this would have a positive impact on (cheaper) oil prices and essentially gain commodities.
The following is the federal funds interest rate that has been creeping back up since 2020 after being close to 0.
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