The stock market’s decline intensified during the second quarter of 2022. The S&P 500 Index fell 16.10% for the three-month period ending June 30. For stocks, this was the worst first half of a year since 1970.

Despite the pain, we believe the second half of 2022 will provide solid returns for stocks; historically, it should be noted that the vast majority of the stock market’s long-term returns have been generated in the 4th quarter. Indeed, it is our view that much of the bad news and economic data, including a possible recession, have largely been priced into the market. Valuations have come down to very reasonable if not attractive levels, and there are signs that some economic headwinds may be easing.

Over the last 96 years, stocks have averaged a powerful 10.5% average annual return, despite experiencing 26 bear markets during that time frame. That’s more than one bear market – a 20% plus decline – every four years.

Your average bear market lasts for 289 days and has an average sell off of around 35%.2 This bear market (which includes the fall from January’s peak) is already six months old and has so far seen a max drawdown of 24%.

So, while markets certainly could go lower in the months ahead, history tells us that we are likely closer to a bottom than we are from the top.

No doubt, the headlines for equity investors in the first half of 2022 were challenging, to say the least. The rise in inflation over the past year has been breathtaking, with the Consumer Price Index rising 9.1% from just a year ago.

However, there are several indicators pointing to a possible peak in inflation that were not reflected in the CPI report. First, crude oil prices fell nearly 8% in June, and national gas prices have fallen more than $0.50 per gallon since the June 14 peak of $5.01.

Commodity prices have cooled considerably, falling 20% since early June. Food prices also appear to be topping out in many parts of the country, and the housing market has chilled as buyers adjust to rising mortgage rates.

Remember, stocks do not need perfection to generate solid returns. If inflation rates begin to decline, a forward looking stock market will take notice, providing a fertile backdrop for solid gains in the months ahead.

To close, it was a rough first half of the year for all of us. We don’t know when a bottom will be made in stocks, but believe we may be close. Furthermore, your portfolio is superbly positioned for long-term growth and should participate robustly in the inevitable rebound.

Sincerely,
James C. Burns, CFA
President