The S&P 500 stock index dipped into bear market territory this week, mainly in response to ongoing inflation concerns, worries the Federal Reserve may raise interest rates too high too quickly, and signs that the pace of economic growth may be slowing. The late-May implosion of a multi-billion dollar hedge fund, Melvin Capital, added more anxiety to a stock market that was already on edge.
In our recent quarterly letters, which you can revisit on our website, we have discussed post-Covid inflationary pressures being exacerbated by Russia’s atrocious war on Ukraine. We’ve also pointed to rising economic headwinds stemming from the Fed’s push to raise interest rates, a move intended to reduce demand and thereby lower inflation – but with potential risk of a “hard” landing rather than the “soft” landing the Fed hopes to engineer. Evidence of slower growth is apparent in the most recent housing data, as the highest mortgage rates since 2009 sent new home sales tumbling more than 16% in April from the prior month, even as home prices continued to climb from a year ago.
Despite the sharp declines in both stock and bond prices we’ve already experienced this year, we would not be surprised to see markets remain volatile in the near term as investor expectations adjust to a more challenging growth and inflation environment. However, while we recognize the rising risk of recession – or even stagflation – we believe the markets are well-positioned to endure through short-term uncertainty and ultimately recover. Notably, S&P 500 corporate earnings forecasts remain at record levels, and interest rates, while rising, are still moderate by historical measures. Of course, we continue to monitor the markets for new signs of turbulence, but we are not recommending major changes to your portfolios based on currently available data.
We want to point out that higher rates today may hint at potentially higher returns in the future. Also, as Goldman Sachs recently highlighted, “We remind investors that the best days in the equity markets often come at its worst moments. We believe the risk of missing out on the recovery still exceeds the risk of further pullback. This belief is even more justified over a longer time horizon.”
As always, we are available to talk with you regarding your specific portfolio and investment goals.
The Evermay Team
 “Context on Bear Markets,” Goldman Sachs Asset Management, May 23, 2022