Dear clients and friends,
An old adage states, “It’s hard to drive a car while looking in the rear-view mirror.” Yet, a look back at past events may inform us about the road ahead. We’re sure you know the past six months have been tumultuous for financial markets, spurred in large part by aggressive central bank monetary tightening in the face of the highest inflation in more than four decades, made worse by the invasion of Ukraine. Bond yields have surged, with several major bond index funds falling 10% to 20% in price.[1] Stocks have fared no better, with the S&P 500 turning in its worst first-half performance in over fifty years.[2]
Do such events foretell of continued weakness and recession in the second half? Maybe, maybe not. Indeed, predictions gleaned from the market’s crystal ball are often on par with the non-committal responses from a child’s Magic 8 Ball toy: “reply hazy” or “ask again later.” A recent Bloomberg article points out that a weak stock market in the first half of a year is not indicative of what’s to come in the second half.2 As the article documents, since 1957, when the S&P 500 performed poorly in the first half, the stock index had a negative second half roughly 50% of the time – about the same odds as a coin toss.
And while it’s widely believed that recessions are preceded by stock market selloffs, the likelihood of a bear market foretelling of recession isn’t much more than a coin flip either. As Nobel-prize winning economist Paul Samuelson joked in a 1966 Newsweek article, “The stock market has predicted nine of the past five recessions,” a comment intended to ridicule the stock market’s alleged predictive powers. CNBC later showed that even Samuelson overstated the market’s prognosticative abilities – in fact, at the time the Newsweek article was published, the previous nine bear markets had preceded only three recessions! The news service further documented that, since WWII, about half of bear markets had led to recession.[3]
So will it be heads or tails for the remainder of 2022? And if a recession does occur, what is the likely impact? Forbes reports that, since 1945, the S&P has actually risen an average of 1% during post-WWII recessions.[4] If markets are indeed forward looking, it is possible they bottom well in advance of reported economic data. The important thing to keep in mind when looking ahead is that there are uncertainties to any outlook and surprises may happen, in the markets and in our personal and professional lives. As always, we encourage you to reach out at any time to discuss your portfolio to ensure your mix of assets is appropriate and aligned with your financial goals.
On a separate note, we are reminded that even in periods of extreme market volatility many in the world are far worse off than we are, and we find joy in sharing our blessings with others. As Winston Churchill once opined, “We make a living by what we get, but we make a life by what we give.” With this in mind, during the second quarter Evermay sponsored a 5K fundraiser run for Orphan Care Ethiopia, a not-for-profit organization dedicated to fighting the Ethiopian orphan crisis. More information about the program and the event can be found on their website, orphancareethiopia.org.
With best wishes for the third quarter,
Mitch Schlesinger, Equity Strategist
[1] FactSet, comparison of year-to-date total return of US Aggregate Bond ETF (AGG), iBoxx Investment Grade Corporate Bond ETF (LQD), iShares 20+ Year Treasury Bond ETF (TLT) as of 6/30/2022
[2] Bloomberg.com, “S&P 500’s Brutal First Half Has Little Bearing on the Future,” 6/30/2022
[3] CNBC.com, “Can the markets predict recessions? What we found out.” 2/4/2016
[4] Forbes, “How Does The Market Perform During An Economic Recession? You May Be Surprised” 6/2/2022
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