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As we wrap up the first half of 2022 it has been rather turbulent, to say the least. The year began with renewed concerns about the pandemic. Thankfully, the omicron variant proved less severe than its predecessors, and our earlier optimism was restored.
While society appeared to be getting back on its feet, the highest inflation in decades emerged. This led to uncertainty as economists and investors tried to predict the impact of the central bank’s recalibration of policy in response to inflation that was proving to be less transient than originally expected. The result was spiking yields amid fear that strong medicine was required to tame inflation, which infiltrated the investor psyche.
If that wasn’t enough, Russia invaded Ukraine in February, spurring a major geopolitical event that caused another recalibration of earlier assumptions. The importance of Russia’s fossil fuels to Europe and the economic sanctions that ensued against Russia sent price shocks throughout the world for oil, natural gas, and coal. Agricultural commodities have also been impacted due to Ukraine’s significant production of these products, contributing to higher global food prices.
Thinking back to my January 11thcommentary ‘2022 Outlook: A Mid-Cycle Market’ I used the analogy that “we’ll get to our destination but there will be pit stops along the way.” As we surpass the halfway point of the year, it appears we have been stuck in rush hour - stand still traffic in Toronto during a late Spring snowstorm.
So where do we stand and what explains this? Sentiment. Most steep downturns feature one or two big scary stories, like 2020’s COVID lockdowns or 2011’s euro crisis and US debt ceiling fight. Today, I count at least seven scary stories and none of them are huge alone, but they have taken turns dragging down stocks all year.
The bad news is this was the 5thworst start on the S&P 500 since 1929. The positive, eternal optimist view is that after 5 worst starts the market returned on average 24% the next 6 months.Yes, 2022’s decline is officially a bear market, having closed below -20% from late December global highs. But there is nothing about that “official” -20% threshold that changes what we do moving ahead. Investment decisions must be forward-looking – not backward and being here today doesn’t imply big downside ahead or a long decline.
There are no shortage of opinions and hot takes from the ‘experts’ on wall street, bay street, BNN and the only common factor amongst them is we should expect continued volatility and uncertainty. Setting the tone and expectations moving forward into the back half of the year I expect a choppy summer and rally into the fall/end of the year. Click on the link as we unpack investment markets to start the year and help provide insight to you and your portfolio.
