Global markets closed out the most tumultuous first half of a year in decades driven by accelerating inflation, the war between Russia and Ukraine and a doubling of riskfree interest rates (including yields on riskier securities). However, the latter half of the year should be better, says BigSur Partners’ latest The Thinking Man publication.
The S&P 500 fell 21%, suffering its worst first half of a year since 1970. Investment-grade bonds, as measured by the iShares Core U.S. Aggregate Bond exchange-traded fund, lost 11%— posting their worst start to a year in history (or at least since 1842). Non-investmentgrade or “junk” bonds, as measured by the iShares iBoxx High Yield Bond exchangetraded fund, fell 15.4%. Also, both stocks and bonds posted a negative first and second quarter, consecutively.
This has been the result of a global phenomenon, not just a US one. Stocks and bonds in Europe, markets in EAFE, and emerging markets all tumbled, hurt by slowing growth and stickier than expected inflation.
On the other hand, cryptocurrencies came crashing down, burdening institutional and individual investors alike with steep losses. Anecdotal evidence does show that younger generations have been hit the hardest, as sectors like Crypto, IPOs, SPACs, and super-high growth areas like EVs, AI, Robotics and Cloud Computing are down over 70% from their all-time highs back in 2021.
About the only thing that rose in the first half was commodity prices. Oil prices surged above $100 a barrel, and U.S. gas prices hit records after the Russia-Ukraine war disrupted imports from Russia, the world’s third-largest oil producer. However, investors have been underweighted commodities after years of underperformance and under-investment in the sector.
“Volatility has increased dramatically in all markets,” comment BigSur experts, adding that “we see no reason for volatility to decrease in the second half of the year.”
On the flip side, the Fed and central banks plan to continue raising interest rates to try to curb inflation. “The moves will likely slow down growth, potentially tipping economies into recession and generating further tumult across markets,” the experts reflect.
The good news for investors is that markets have not always underperformed after suffering large losses in the first half of the year. In fact, history shows that they have often done the opposite. There have only been five instances in history in which both stocks and bonds posted negative returns for two consecutive quarters.
Recessions have been associated with three of the previous four periods, and the jury is still out on this latest case.
However, no one is talking about a deep or prolonged recession. There is general agreement and consensus on a shallow and short recession. When the S&P 500 has fallen at least 15% the first six months of the year, as it did in 1932, 1939, 1940, 1962 and 1970, it has risen an average of 24% in the second half, according to Dow Jones Market Data.
Fund managers currently have above-average cash positions, below-average equity positions and a marked degree of pessimism about the economy.
To read the full BigSur Partners report, please click on the following link.
Por Funds Society, Madrid