Wall Street set records in the first half of the year, none of them good.
The economy is on the brink of a recession, ravaged by high inflation and rising interest rates, which are hurting wages, eroding consumer confidence and leading to corporate austerity. While it faltered, the markets have tanked.
The stock market is headed for the worst first six months of the year since at least 1970. The S&P 500 index, the cornerstone of many stock portfolios and retirement accounts, peaked in early January, falling 19.9 percent in the past six months.
The sell-off was remarkably broad, with declines in all sectors except energy this year. Bellwethers, including Apple, Disney, JPMorgan Chase and Target, have all failed more than the overall market.
And that’s only part of the horror story for investors and companies this year.
Bonds, which are believed to provide lower but more stable returns for investors, have also had a dire six months. Because bonds are particularly sensitive to economic conditions and reflect shifts in inflation and interest rates more directly than equities, this is perhaps an even more worrying sign about the state of the economy.
An index that tracks the 10-year Treasury Note, a measure of the cost of borrowing mortgages, business loans and many other types of debt, has fallen in price by about 10 percent. Analysts at Deutsche Bank had to go all the way back to the late 18th century to find a worse half-year return for equivalent bonds.
“Make no mistake, this was a scorching first half,” said Jim Reid, chief of credit strategy and thematic research at Deutsche Bank.
For the average investor with a diversified portfolio of stocks and bonds, it probably feels like “nothing worked,” according to Victoria Greene, the chief investment officer at G Squared Private Wealth. This is especially true for investors who bought early in the year when markets were in a more upbeat mood. “The venerable 60-40 portfolio has not held up at all,” said Ms. Greene, referring to the mix of 60 percent stocks and 40 percent bonds that financial advisors traditionally suggest to investors to protect them from a downdraft.
Since the beginning of the year, persistently high inflation, now at its fastest pace in more than 40 years and exacerbated by rising food and energy prices following the war in Ukraine, has eroded corporate profit margins. That’s on top of tenacious supply chains that have also made it harder for companies to fill customer orders and manage inventory.
As investors reassessed the outlook for companies and sold their shares, the S&P 500 fell into a bear market a few weeks ago, a rare and grim sign of pessimism, which Wall Street defines as a 20 percent drop from a recent peak. The index has failed in 10 of the past 12 weeks, with occasional rapid rallies as another wave of market concerns.
The Federal Reserve’s determination to curb inflation by raising interest rates is a major factor in the market turmoil. Higher borrowing costs cool the economy by lowering demand, which in turn reduces price pressures. The sharply higher bond yields, which move in the opposite direction to prices, have left bond investors’ portfolios with losses.
And if the Fed’s fight against inflation requires rates to rise so high, so fast that the economy slides into recession, it would limit companies’ ability to hire new staff, spend on new projects and repay their debt. pay, which is ominous for both stocks and bonds.
Assets thought to be unaffected by these trends also offered little refuge. Bitcoin, the largest cryptocurrency, has failed more than 50 percent this year.
When looking at the financial wreckage, the question arises: how bad can it get?
In the coming weeks, companies will begin reporting their second-quarter results and briefing investors on how their finances are doing. These reports will be scrutinized for signs that the shaky economy is deteriorating, which will play a role in buying and selling decisions.
Just as important as what companies reveal about their last quarter is what they say about how things develop for the coming quarters, according to Steve Sosnick, the chief strategist at Interactive Brokers.
“Overall, expectations remain very high,” he said. That’s either a sign that conditions may not be as bad as fear, or they’re going to disappoint. Earnings forecasts from analysts at companies like Apple and JPMorgan Chase have remained relatively stable over the past month.
Andy Sieg, the president of Merrill Lynch Wealth Management, said he has not seen a major increase in trading activity among customers, which could be expected during a period of turmoil. However, the past year has seen a major surge in the number of clients seeking conversations about financial planning, which he described as a “constructive” approach to dealing with the recession.
“When the markets are more volatile, emotions rise,” Sieg said. “That’s just a normal human response to the kind of environment we live in.”
Even if the news about corporate earnings or the economy isn’t as bad as some fear, it may take some time for the bleak mood to turn, for what many believe is yet another false dawn that marks a decisive turning point. “Normally a bear market changes when the world still feels terrible,” said Ms Greene of G Squared Private Wealth.
“There is only one real bottom,” said Mr. Sosnick from Interactive Brokers. “That really is the final turning point. And so it’s not clear to me that we’ve seen the conditions that have one of those signals already.”
For Deutsche Bank’s Mr Reid, “a lot depends on the timing of the recession,” he said. The fall in share prices so far, according to his research, would be an extreme outlier if it were not accompanied by a recession.
Economists have raised the likelihood that the US economy is on the brink of recession, and a contracting economy is a better fit for the size of the market decline Mr Reid expects. He thinks it is “plausible” for the stock market to fall 35 to 40 percent from its January high, meaning the current decline is only about halfway through.