June 2022 U.S. Market Update - 2022 Outlook
Surviving the Second Half of 2022
Aaron Kolkman, MSF, CFP®, CKA®
In 2021, we saw an extended tech rally driven by low interest rates in the context of pandemic-era digitization of life. Indexes marched higher on just a few big tech names. Even the world’s best asset managers that didn’t own big tech, or investors that didn’t follow an indexed approach, experienced 2021 with lagging results. Weakness appeared in equity markets during Q4, 2021. So far in 2022, markets have continued moving downward. The bear market is now officially here for all major U.S. stock indexes. Here’s what we know: price inflation is at record highs, driven mainly by higher energy costs and supply chain disruptions. Going forward, expect energy prices to level and food prices to jump, pushing prices higher into Q3 (possibly Q4) 2022. The expected increase in food costs is due to the less efficient, less discretionary nature of food markets, versus energy markets. Note that good inflation tracking uses the CPI (not CPI-U or “core CPI”), because the CPI includes food and energy costs.
No matter the market, recall that long-term investing supports life goals. In the meantime, here are a series of points to help set your short-term expectations as we move through the current bear market:
- Since 1927, only 3 of 14 bear markets did not produce a recession.
- Since 1927, the extent of the 14 bears, was a drop in the S&P 500 of 34%, with a slightly lighter drop since WWII, down 31%.
- Since 1927, the length of the 14 bears was 1.5 years average, with 3 lasting less than 4 months.*
*The most recent bear market on record was 2020, with a 33.9% drop in the S&P 500 index. The 2020 bear both developed
and recovered in record time. Notably, it took less than three weeks for stocks to rise 20% from their low in March 2020.
- Equity prices lead economic activity by 1-2 quarters (3-6 months).*
*Expect an economic slowdown in 2023 – more the 2020 slowdown during the height of COVID-19
- Equity prices have moved to where S&P 500 forward Price-to-earnings (P/E) multiples are now about 17 – a historical norm.
- This important point underscores the idea that our current bear market has only a short distance left to travel.
On January 3, 2022, the S&P 500 closed at 4796.56. On June 16, the index closed at 3666.77 (a 23.5% drop). Expect another 7.5%-10.5% drop during summer, 2022, before we see equity prices begin to recover. This puts an estimated bottom on the S&P 500 in the range of 3521.37 to 3405.03. At FIDERE, we will generally continue to hold current positions and cash until there is some assurance that a bottom has been set, and prices are moving higher. Until that time, we encourage clients and friends of the firm to exercise patience and focus on life goals. Accruing cash in anticipation of higher-moving asset prices, and systematic investing into brokerage and retirement accounts/plans, etc., is all highly encouraged.
Fidere Advisors is a privately-owned, full-service life planning firm, offering financial planning and asset aggregation. Asset aggregation systems are designed to align portfolios across accounts into a single, globally-optimized investment plans for the families it serves. FIDERE maintains liquidity of client capital at major custodians, and utilizes asset managers that have shown consistent historical performance through excellent risk management.
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Advisory Services through Fidere Advisors, LLC (dba FIDERE), a Registered Investment Advisor. Information provided has been prepared from sources believed to be reliable but is not guaranteed and does not represent all available data necessary for making financial decisions and is for informational purposes only. FIDERE and its representatives do not offer tax or legal advice through FIDERE. Please consult the appropriate advisor.
THE RISK MANAGER consolidates current information into actionable content designed to help investors navigate risks in the current economic and market environment – from a conservative view. The larger purpose of this work is to optimize financial plans and bring the reader closer reaching long-term life goals.
Kolkman, Aaron. (2014). The Life Cycle of Wealth: Four Phases of Your Financial Life. Tate Publishing.