Americans who have stock portfolios or retirement plans would prefer to forget about the past six months.
After starting the year at an all time high, the S&P 500, Wall Street’s broad benchmark for many stocks funds, fell 20% to the end June. According to Axios calculations, it’s the worst start for stocks since 1970.
Investors have faced uncertainty and fear as the Federal Reserve raised interest rates dramatically to try to control the most severe inflation in forty years. While higher rates may bring down inflation, they can also slow down the economy and increase the chance of a recession. This has led to a decline in the value of stocks, bonds, and other investments.
The S&P 500 plunged into a bearish market on June 13 and is currently at 20.4% below its January 3, all-time high of 1,399 — back to late 2020.
“[T]he good thing is that H1 has ended. In a research note, Jim Reid from Deutsche Bank stated that H2 prospects are not good.
The market crash has decimated $3 trillion worth of 401(k), IRAs, and other retirement assets. This is a significant setback for those who are soon to retire. It also highlights the more risky nature of today’s retirement plans. A 401(k), on average, takes two years to recover its value following a market downturn of this magnitude.
“Younger people can sort of wait it out,” Alicia Munnell from Boston College’s Center for Retirement Research, recently told CBS MoneyWatch. This kind of event can really affect those who use retirement funds to support their families.
The Fed has been the central figure in the market’s decline, having raised its short-term key interest rates three times this year. The Fed’s latest increase was three times the usual rate and was its largest hike since 1994. It is almost certain that there will be more outlandish increases.
“You could argue they are just playing the hand they were dealt. But the truth is that they got caught a bit behind the curve. Their pivot to a more aggressive policy stance and their selling off has been caused by this,” stated Ross Mayfield, Baird’s investment strategist.
Retailers, technology companies and other stocks that were huge winners during the pandemic are among the worst losers. This includes a 35% plunge for Tesla, a 70% decline for Netflix, and a 50% plunge for Meta (Facebook parent).
Since the beginning of the year, the Nasdaq composite, which is tech-heavy, has lost 29.5%.
These stocks are now seen as too expensive relative to other less risky markets such as utilities and household goods manufacturers. These stocks are sometimes called “value stocks” to differentiate them from high-growth stocks.
This year, energy is the only sector to gain this much among the 11 in the S&P 500. This sector has seen a 29.9% increase in its performance, thanks to rising gasoline and oil prices. Only eight of the 25 stocks that have increased more than 20% this past year are energy companies.
A classic squeeze is responsible for the pump’s high prices.
After the coronavirus exploded, gasoline and other oil products saw a surge in demand. However, gasoline and crude oil supplies have been scarce. Russia’s invasion in Ukraine has upset a key region for energy production. At the end of last Year, sanctions had been placed on Russia to prevent it from importing oil.
After several refineries were shut down during the pandemic, the United States’s oil-to-gasoline ratio has dropped. According to the U.S. Energy Information Administration, U.S. refinery capacity has fallen for two consecutive years.
According to AAA, this has caused gasoline prices to soar to new heights. The national average price for a gallon regular gas was $5.
This has meant misery for many drivers but a nice return for investors who have placed their money on energy stocks.
To ensure that such strength continues, however, fears about a recession must be quelled. In the past, recessions have caused drops in oil prices because they destroyed demand. According to Barclays strategists, the stocks of energy companies fell more than oil prices over the past week as investors became more afraid of such a scenario.
Bonds are supposed be the more stable and reliable part of a portfolio. They not only lost investors in the first half, but are on track for one of the worst performances in history.
As of Monday, high-quality, investment grade bonds were down 11.3% in the first six months 2022. A down year for bonds is an important thing. The Bloomberg US Aggregate Index, which is used by many bond funds as their benchmark, has only four losing years since 1976.
Treasurys fared worse. Deutsche Bank’s 10-year Treasury Index had the worst six-months on record dating back to 1788.
The Fed’s response to high inflation is the reason for this year’s losses. Investors find inflation to be a problem because it reduces the purchasing power of fixed-payment bonds in the future.
Already this year, the yield on the 10-year Treasury has more than doubled. It was at 2.98% on Thursday afternoon. The Fed may continue to raise rates, but analysts believe the worst may have passed.
The Wells Fargo Investment Institute has recently increased their forecast of where the 10-year Treasury will finish this year to a range between 3.25% and 3.75%. They also expect it to moderate in the next year, to a range between 2.75% and 3.25%.
Cryptocurrencies have been promoted by supporters as a way to protect against inflation and provide a safe haven from the stock market’s declines. They have not been either of these things this year.
Bitcoin fell from $69,000 in November, to just $20,000 this month. This was partly due to the same forces which hammered stocks: inflation and higher interest rate.
Investors’ confidence was also affected by events that are unique to the cryptocurrency market. Investors lost around $40 billion when a stablecoin crashed. According to reports, a hedge fund that was dedicated to digital assets was in danger of liquidation. As they tried to improve their finances, some banks-like organizations that take cryptocurrencies and lend them out suspended withdrawals.
Economists think that inflation will decrease in the second half, but there are still concerns about the Fed’s interest rate hikes pushing the economy into recession. It’s no surprise that investors are cautious about 2022.
Some investors are looking to invest in more inflation-proof investments like commodities and managed futures. Peter Essele is the head of portfolio management at Commonwealth Financial Network. However, there are some data that suggests inflation may have peaked. This means that such investments might not yield the same returns as they did earlier in the year.
History has shown that years that begin poorly can rebound, stated Ryan Detrick, Chief Market Strategist at LPL Financial in a research note.
He said that although the first half of 2022 was a terrible year for investors, previous years with a minimum 15% drop in the mid-year saw their final six months rise every time, with an average return close to 24%.
Reporting by Aimee Picchi and Irina Ivanova of CBS News.
