Bruised U.S. stock investors brace for more pain in second half of 2022

With US stocks on track to post their worst first half in more than 50 years, investors are studying a variety of metrics to determine whether the coming months could bring relief, or more of the same.

In any case, the first half of 2022 has been challenging for investors. The S&P 500 is down about 18% so far this year, on track for its worst first half of any year since 1970, according to the S&P Dow Jones Indices, as the Fed tightens monetary policy in its fight against inflation. highest in decades.

Bonds, which investors often count on to offset declines in stocks in their portfolios, have fared little better — the US bond market for its worst performance in modern history.

With investor expectations fluctuating between continued high inflation and an economic downturn triggered by an aggressive Federal Reserve, few believe market volatility will dissipate any time soon.

“We don’t expect the turmoil and volatility that we’ve seen during the first half of the year to subside,” said Timothy Braude, global head of OCIO at Goldman Sachs Asset Management.

Historical data paints a mixed picture of the path markets may take in the coming months. For one thing, sharp declines in stocks have often been followed by sharp rebounds: Previous years in which the S&P 500 was down at least 15% at the midpoint saw the last six months rise each time, with a average yield of nearly 24%, according to data from financial LPL in market declines since 1932.

The S&P 500 rallied more than 3% on Friday for its biggest one-day percentage gain since May 2020, as signs of slowing economic growth prompted investors to lower expectations about how high the Federal Reserve will raise interest rates to control inflation. For the week, the index is up 6.4%.

One factor that may sustain that near-term rally is the end-of-quarter rebalancing, as institutional investors such as pension funds and sovereign wealth funds draw on record cash levels to get equity allocations back on track. line with your goals.

That phenomenon could lift markets by as much as 7% over the next week, JP Morgan analyst Marko Kolanovic said in a note on Friday.

Meanwhile, several so-called contrarian indicators followed by analysts in BoFA Global Researchincluding cash allocations and investor sentiment, are showing signs of buying, analysts at the bank said in a note.

Jack Janasiewicz, Lead Portfolio Strategist and Portfolio Manager at Natixis Investment Managers Solutions, believes the second half of the year is likely to be better than the first. He is becoming more bullish on stocks, particularly shares of big battered tech companies with strong balance sheets, such as Google parent Alphabet Inc.

“There is a lot of bad news on the economy,” he said. “We think the risk is to the upside.”

However, investors holding on to an eventual change of course can experience a stomach-churning ride.

A study of bear markets over the past 150 years by Solomon Tadesse, head of North American quantitative strategies at Societe Generale, showed that stocks tend to bottom out once they correct the “excesses” of the previous bull period. That would see the S&P 500 drop another 22% to 3,020, according to his research, which measures percentage declines during past crises of similar magnitude.

The market sell-off is “an unavoidably necessary correction of post-COVID excesses,” he said, describing a stimulus-fueled rally that saw the S&P 500 more than double from its March 2020 lows.

Skepticism about the sustainability of a market rally extends to individual investors as well. A survey of the American Association of Individual Investors in the week ending June 22 found that 59.3% believe the US stock market will be bearish over the next six months.

Brian Jacobsen, senior investment strategist at Allspring Global Investments, believes a recent drop in bond yields may help reduce volatility in the markets, providing opportunities in areas such as emerging market equities and high yield bonds. Of short duration.

For now, though, he remains cautious on the US stock market.

“From an industry perspective, nothing screams safe,” he said.