Welcome to the final part of our 2022 Halftime Report! The goal of this 4-part report is to help you better understand what happened in the markets in the first half of 2022 and what may unfold in the months ahead. In this report, we’ve covered a review of the first half of the year and a closer look at what drove U.S. equity market performance. In this post, we’ll look at the outlook for the second half of 2022.
Now, let’s dive into forecasts for the second half of the year.
U.S. Gross Domestic Product
The sharp post-pandemic economic recovery is firmly in the rearview mirror. As you can see in the chart, the Federal Reserve projects that the economy will veer toward more historical norms of economic expansion in 2022, 2023, and 2024.
Of course, positive or negative surprises on GDP growth in the second half may influence financial markets. In part, corporate earnings are reliant on the pace of the overall growth in our economy. Remember, forecasts are based on assumptions and subject to revisions over time. Financial, economic, political, and regulatory issues may cause the actual results to differ from the expectations expressed in the forecast.
Market Strategists
Some market strategists look at the “Bottom-Up Earnings Per Share” to help set their price target for the S&P 500 Index.
When setting a “Bottom-Up EPS,” market strategists focus their attention on estimating earnings for all S&P 500 companies. By contrast, a top-down investing target price places a greater emphasis on macroeconomic factors when making an investment forecast.
The chart shows the “Bottoms-Up EPS” and the price of the S&P 500.
A word of caution on this type of analysis. It shouldn’t be seen as a flawless predictor of future stock price performance. That said, note how stock prices got ahead of corporate earnings, leading to more expensive valuations. As the market corrected over the first six months of 2022, you can see price levels now have dipped below the projected earnings line.
Here are a few things to keep in mind: first, past performance does not guarantee future results.
Second, individuals cannot invest directly in an index.
Third, the return and principal value of stock prices will fluctuate as market conditions change, and shares, when sold, may be worth more or less than their original cost.
Inflation Expectations
Inflation fears have weighed on the stock market. This slide shows what market participants expect inflation to be over the next ten years. As you can see, these expectations rose throughout 2021 but have moderated a bit in 2022. The intersection of economic growth and inflation will likely be critical to investors since one emerging concern is the idea of stagflation.
Stagflation is an economic environment characterized by slow growth, rising unemployment, and elevated inflation.
The Fed is pursuing a more aggressive monetary policy to combat today’s high inflation, which is why the remaining FOMC meetings are so important to the markets. The forecast for the 10-year breakeven inflation rate is based on assumptions and subject to revisions over time. Financial, economic, political, and regulatory issues may cause the actual results to differ from the expectations expressed in the forecast.
Federal Reserve Meetings
Investors’ inflation concerns may mean that Wall Street keeps one eye on the Federal Reserve’s scheduled meetings in the coming months. Investors will be listening closely to the announcements coming from these meetings to gain an insight into how aggressive the Fed will become with future rate hikes and balance sheet reduction steps.
So, what could be ahead?
The Federal Reserve Open Market Committee is scheduled to meet four more times in 2022:
- July 26–27
- September 20–21
- November 1–2
- December 13–14
Typically, if the Fed is going to make an adjustment to interest rates, it will announce the change following their two-day meetings.
Fixed Income: Bond Yield vs. Bond Price
Here’s another relationship to understand: bond prices and bond yields have an inverse relationship. In other words, when bond yields go up, bond prices go down.
After experiencing years of low interest rates, some investors may be surprised to realize their bonds can lose money if sold before they reach maturity.
Bond values may decline during periods of rising interest rates. But a changing tide in the economy doesn’t mean you have to abandon a fixed income. Often, this movement is an important part of a well-balanced, diversified portfolio that may provide investors with the income they need.
However, keep in mind that there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
Stay Focused on the Fundamentals
Tuning out headline noise while managing your finances is not always easy.
However, wise investing involves more than reacting to headlines that may discuss consumer sentiment or geopolitical developments.
For investing opportunities, one approach is to stay focused on fundamentals like a company’s earnings or economic data.
Annual Returns and Intra-Year Declines
We’ve gone over a lot today, and if you remember just one detail from our presentation, we hope it is this: emotions have no place in investing.
Market corrections are a normal part of market cycles. The first half of 2022 is a good reminder.
This chart shows the intra-year lows each year, going back to 1980 in yellow, with annual returns shown in gray. As the chart illustrates, there have been many years that saw declines intra-year.
Volatility can be uncomfortable, but it is normal. Managing your emotions during good times is just as important. Ultimately, taking a long-term view of the markets is essential when pursuing your long-term goals.
If you ever feel concerned or want to understand what’s happening, lean on us for support. We are here for you, and we want to help you make the most of your financial life. Remember, past performance does not guarantee future results. Individuals cannot invest directly in an index. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
Tune Out the Noise
This slide shows why it’s important to “tune out the noise” and focus on your time horizon, risk tolerance, and goals.
If we look at the market since 2006, we can see the danger of missing some of the market’s best days. As the chart illustrates, a $10,000 investment on January 2, 2006, would have increased to more than $45,000 by the end of 2021.
Had an investor been out of the market and missed just 10 of the best days during this period, that investment would be worth $20,929. If an investor missed 20 of the best days, that investment would be worth $12,671. Miss 30 or more of the best days, and an investor would have lost money.
Investors who sell stocks in response to difficult market conditions often miss those all-important “best days.”
The S&P 500 Composite Index is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change, and shares, when sold, may be worth more or less than their original cost.
We’ve gone through a lot of information in our Halftime Report, and you might have lingering questions. So, let us know how we can help!