Posted by David Matzko
Wednesday, May 4, 2022
2022 has been one of the worst starts to a year ever for stocks and bonds. The reasons for the rough start, which are widely known, include inflation, a hawkish Federal Reserve (Fed), soaring yields, the conflict in Ukriane, and a slowing economy.
So we know all of the worries, but now we’ll take a look at 4 things you might not know, but should.
A bad start to the year isn’t fun, but it isn’t always a sign of things to come. “2022 ranks as the third worst start to a year ever for the S&P 500 Index,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But looking at the 10 worst starts ever shows that stocks tend to bounce back nicely the rest of the year, up 10% on average.”
As you can see below, continued huge losses the final 8 months are rare, with potential double-digit gains quite possible. The only years the final 8 months saw stocks lower were in 1941 (U.S. entered World War II), 1962 (The Kennedy Slide and Cuban Missile Crisis), and 1973 (oil spike and recession). We continue to expect the U.S. economy to grow at 3% in 2022 and avoid a recession, so an eventual large snapback rally later this year is quite possible.
The Fed will likely hike rates today (we expect a 50 basis point, or 0.5%, hike). As shown in the LPL Chart of the Day, previous Fed rate hiking campaigns has seen stocks perform fairly well. Looking at times of aggressive rate hikes shows that in 1994 the Fed quickly hiked from 3% to 6% and stocks were flat, while over a two-year period from 2004 to 2006 they hiked from 1% to 5.25% and stocks gained 11%. Yes, some periods of rate hikes saw stocks decline, but a period of aggressive hiking simply by itself isn’t a reason to expect stocks to do poorly.
Is a bear market possible without a recession? The answer is yes, but quite rare. Given the S&P 500 has corrected nearly 14%, how likely is it that things could spiral into a bear market? Well, if we can avoid a recession (our base case) we’d say the odds are slim.
Looking back in history, 1987 was the last time the S&P 500 was in a bear market without a recession. Then 1978, 1998, 2011, and 2018 all were more recent years that saw stocks nearly in a bear market (down 19%), but the economy avoided a recession. Adding up everything that we know, we’d side with a decline of 20% still not being our base case, with the market weakness likely closer to a major low than not.
Lastly, the S&P 500 peaked on January 2 and so far the low during the correction was on April 29, for a 13.9% correction. Turns out, there have been 24 other corrections since World War II, with an average decline of 14.3%, while it took 133 days to find the ultimate low. Given the current correction is 13.9% and has lasted 117 days already, we are getting into the range where previous corrections indeed hit bottom.
For more on one of the worst starts to a year ever and should you Sell in May, please watch the latest LPL Market Signals podcast with Jeff Buchbinder and Ryan Detrick, as they break it all down.
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