Weekly Market Update

Good riddance to June, the second quarter, and the first half of 2022 as the S&P 500 registered its worst start to a year since 1970 and many bonds were no better. For example, per data from Deutsche Bank, the 10-year US Treasury, historically a safe haven asset, recorded its worst half since 1788, just before George Washington became President. As a result, investors have had exceedingly few places to hide in markets and conservative and aggressive portfolios alike have all experienced one of the most challenging market environments in decades.

Heading into the dog days of summer, we expect inflation and the Fed to continue to dominate market sentiment, but generally quarters of weakness like we saw in the second quarter are followed by strength. For example, going back to 1928, the S&P has experienced nineteen quarters of 15%+ drawdowns (Q2 2022 declined by 16%). On average, the next quarter saw positive returns almost 70% of the time for an average S&P gain of 11.5%. Furthermore, even if the third quarter defies historical averages, the fourth quarter lines up well with the potential for inflation to finally moderate and the track record for midterm elections to precede very strong 12-month stock market returns. For example, since 1950 there have been eighteen midterm elections and 12 months later the S&P 500 has been positive every single time for an average return of 14.7% (per LPL Financial). To be clear, we are not calling for a V-shaped stock market recovery like we saw after the coronavirus bottom, but once we finally get through this painful recalibration of market valuations, contrary to how it might feel right now, there are good reasons to stay the course.

In the meantime, this long weekend for the July 4th holiday is probably particularly well timed for markets.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder