The Worst Half Year Since 1970

The first six months were full of surprises: Inflation. The biggest selloff in bonds in four decades. A plunge in tech stocks rarely matched in history. And the implosion of crypto.

Stocks, corporate debt, sovereign bonds, cryptocurrencies—there was no safety for investors in the first half of 2022. Nearly every asset class finished deep in the red as a perfect storm of runaway inflation, slowing global growth, war, an energy crisis, a food crisis, supply-chain snags, and central bank tightening slammed the markets. According to Bloomberg, this is the first time in 48 years that both stocks and bonds fell in the same period, dealing another blow to the tried-and-true 60/40 stocks-to-bonds investment strategy. SP500 had its worst half-year since 1970.

Investors in oil, oil energy companies, and the dollar are the only winners.



The central bank has raised its benchmark interest rate three times this year and signaled that four more hikes are on deck. The most recent, in mid-June, came in at three-quarters of a percentage point, the Fed’s largest since 1994. Raising interest rates make mortgages, auto loans, and all manner of business investments more expensive; but it also serves to cool an overheated economy by dampening consumer spending, thus cutting demand for goods and services to help bring prices down. However, investors and some businesses worry that the Fed’s action may slow the economy too much, triggering a recession and a wave of layoffs. A recent Bankrate survey of 17 economists put the odds of a recession in the next 18 months at 50-50, said Mark Hamrick, a senior economic analyst for the consumer financial services company.


Consumer spending fell in May for the first time this year and prior months were revised lower, suggesting an economy on a somewhat weaker footing than previously thought amid rapid inflation and Fed interest-rate hikes. Regional Fed manufacturing surveys have taken on a grimmer tone, with four of five indicating business activity shrank in June. Separately, a measure of overall manufacturing slid to a two-year low as new orders contracted, restrained by lingering supply constraints and some softening in demand. An analysis by JPMorgan Chase & Co.’s chief US economist, Michael Feroli, Thursday showed that 35% of households have trouble paying bills, up 10 percentage points from the same time last year. Consumers are borrowing more and running down cash balances to cover higher expenses, Feroli said.


The Federal Reserve Bank of Atlanta last Friday lowered its tracking estimate of US GDP for the second quarter to a contraction of 2.1%, down from a 1% decline in its previous figure. The Atlanta Fed tracking model, known as GDPNow, can be volatile and is designed to give a solid estimate just before each initial reading of GDP. While it’s often been more accurate than Wall Street consensus estimates, it’s been less reliable in the past two years as Covid-19 has changed economic patterns in sometimes unpredictable ways.


Fed Chair Jerome Powell “needs to regain control of the inflation narrative now he’s losing total control,” Allianz economic advisor Mohamed El-Erian recently told CNBC. “He’s got to move because, if he doesn’t, he’s going to be chasing the market and he’s not going to get there.”


“The risks of a 2022 recession are significantly higher than I would have judged six or nine weeks ago,” Summers told Bloomberg Televisions. “If the economy did go into recession in the next six to nine months, then you’d probably see a reduction in inflationary pressures.”


Despite the hard selling in the stock market, the CBOE Volatility Index, the so-called fear gauge, is below levels seen in past bear markets, suggesting the market has not yet seen the washout needed to spark a sustainable rally.

Wall Street analysts are starting to cut earnings estimates for some of the world’s biggest technology companies, undermining the argument that their stocks look cheap after this year’s market rout. Inc., Nvidia Corp., and Alphabet Inc. are among those that have seen earnings estimates fall over the past month amid growing speculation that the Federal Reserve’s aggressive path of interest-rate hikes will trigger a recession. JPMorgan Chase & Co. on Wednesday lowered estimates on 26 internet companies, including Twitter Inc. and Spotify Technology SA.

Michael J. Wilson at Morgan Stanley, one of Wall Street’s most vocal bears, says the S&P 500 needs to drop another 15% to 20% to about 3,000 points for the market to fully reflect the scale of economic contraction. For Peter Garnry, head of the equity strategy at Saxo Bank A/S, the bottom is about 35% below January’s record high, implying further declines of about 17%. 


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