“I think this is among, if not the most complex, dynamic environments I’ve ever seen in my career. We’ve obviously been through lots of cycles. But the confluence of the number of shocks to the system, to me, is unprecedented.” – John Waldron, Goldman Sachs
The S&P 500 just experienced its worst first half in over fifty years and its second-worst start to the year since 1935. Bonds, which typically perform well in times of market weakness, have become positively correlated with equities, leaving balanced investors with essentially nowhere to hide. Long-term treasury bonds lost 20.1 % in the first half, essentially matching the S&P 500 decline of 19.96%. Much of the decline can be attributed to inflation, which the Fed had assumed would be transitory, but has turned out to be more persistent than expected. This has forced central banks globally to pivot from holding rates near zero to a “hawkish” stance in an attempt to stem inflationary pressures. The S&P 500 has officially entered a new bear market (peak-to-trough decline of 20%), the 27th bear market since 1929. The worry is that central bank actions could push the global economy into recession. The chart from JP Morgan Asset Management below suggests that all of the market decline through the first half of the year can be attributed to price/earnings multiple compression. However, we are aware that with economic weakness, earnings will be under pressure to meet expectations over the next few quarters.
Read our full investment commentary and letter to clients by downloading the second quarter 2022 letter.