Ameriprise Financial Inc.
07/05/2022 | Press release | Distributed by Public on 07/05/2022 12:39
As U.S. Recession Odds Mount, Can Stocks Turn Positive in the Second Half of 2022?
Stocks suffered their worst first half of performance in more than 50 years. Unfortunately, at the midpoint of the year, there are few catalysts ready to shift the market narrative over the near-term and following such an atrocious start.
Record-high inflation, surging energy prices, tightening monetary policies, slowing growth trends, weak investor/consumer sentiment, ongoing supply disruptions, a war in Ukraine, and China COVID-19 lockdowns colored the mostly negative tones seen across the market during the first half of the year. In addition, a choppy rise in U.S. Treasury yields during the first half was a meaningful headwind for equities, particularly across growth areas. In our view, investor sentiment and the direction of stock prices are unlikely to materially improve until inflation pressures show consistent moderation and the market believes the Federal Reserve is nearing a point where it can slow/stop its rate hiking cycle.
Stock and bond prices are both down in Q1; this unusual circumstance isn't expected to continue in Q2
Notably, the S&P 500 Index and Dow Jones Industrials Average finished their worst quarter since Q1'20, when the U.S. was in the throes of the pandemic and the global economy was shut down. Overall, the S&P 500 finished its worst first half of performance since 1970. In addition, the NASDAQ Composite closed its worst three-month stretch since the financial crisis in 2008.
In terms of the numbers, the S&P 500 closed the first half of the year down 20%, dropping by roughly 16% in the second quarter alone. The NASDAQ Composite slid almost 30% in the year's first half and fell over 22% in Q2. The Dow Jones Industrials Average lost roughly 14% in the first half and was lower by approximately 11% in the second quarter.
According to Bloomberg, more than $9 trillion in market value has been wiped out of the S&P 1500 Index, which measures U.S. small, mid, and large companies. Energy (+31.8%) was the only S&P 500 sector to finish the first half of the year higher, on the back of WTI crude soaring nearly +51% over the year's first six months.
Consumer Discretionary (down 32.8%) and Communication Services (down 30.2%) put in an abysmal first half as investors sold down high-growth areas of the market. In comparison, Utilities (down 0.6%), Consumer Staples (down 5.6%), and Health Care (down 8.3%) outperformed the broader market in the first half and helped mitigate volatility.
The 10-year U.S. Treasury yield jumped from 1.51% to 2.98% through the year's first six months. As a result, bond prices fell with the rise in interest rates during the first half. The Bloomberg U.S. Universal Index declined by 10.9% over the first six months of 2022. Stock and bond prices falling in tandem is a very unusual circumstance and one we do not expect to continue in the second half.
The Bloomberg Commodity Index rose 18.4% in the first half, driven by higher oil prices. However, the commodity benchmark fell nearly 11.0% in June, as oil prices came down from their recent highs, and several industrial commodities declined precipitously as recession fears mounted. Gold lost about 1% in the first half, while the U.S. Dollar Index rose +2.4%.
On a dollar basis, the MSCI Europe Ex UK Index dropped 24.2% through the first six months of the year and fell 15.7% in Q2. High recession probabilities across the region, slowing manufacturing/services activity, soaring energy prices due to the Ukraine war, weak sentiment, and a European Central Bank that looks increasingly behind the inflation curve were headwinds for stocks across the region. However, the MSCI United Kingdom Index fell just 8.8% in the first half and lost 10.5% in Q2. The UK economy has shown more resiliency in the face of elevated inflation pressures, as the Bank of England has been more proactive in attempting to stamp out higher prices with interest rate hikes.
Across Asia, the MSCI All Country Asia Pacific ex-Japan Index fell 11.5% through the first six months of the year. In Q2, the Index dropped just 3.9%. Easing China COVID-19 lockdown restrictions in the back half of the second quarter and a pickup in manufacturing activity across China helped place a bid under Chinese stocks last month. Also, improved sentiment around China easing its regulatory crackdown on Technology companies and tailwinds from modest policy support helped stock trends improve in the world's second-largest economy. Conversely, the MSCI Japan Index dropped 20.2% in the year's first half and lost 14.6% in Q2. Weak internal demand, a sinking yen, and disrupted supply chains weighed on stock performance.
In the U.S., recession odds continue to mount. Can stocks turn the page in the second half?
In the U.S., recession odds continue to mount. The Atlanta Federal Reserve's GDP Now forecast for the second quarter suggests growth in the U.S. economy will contract for the second straight quarter. And while consumer and business activity may be slowing faster than expected, stock prices often look past the present. In the previous eight times since WWII that the S&P 500 dropped by 15% or more in a quarter, the Index was higher over the next year. Similarly, the U.S. stock benchmark has declined by 20% or more in the first half of the year on seven other occasions. In every instance, the S&P 500 was higher a year later, and by a significant amount. In our view, by the time it's clear the U.S. is in, entering, or was able to avoid a recession, stocks most likely will have rebounded before the signals are obvious.
Yet, stocks could see more volatility in the second half as long as investors remain concerned about the path of inflation and interest rates, which looks pretty likely. Cooling core inflation in the second half could remove some pressure on the Federal Reserve to keep hiking rates aggressively. We believe stocks would react positively to such a development. But inflation pressures that prove sticky and keep the Fed aggressively pressing rates higher could keep stock prices on the defensive. In our view, investors should carefully watch the direction of the 2-Year U.S. Treasury yield. For instance, a declining 2-Year yield may signal higher recession odds and a Federal Reserve more willing to slow or pause its rate hiking cycle.
With the upcoming Q2 earnings season on the horizon, company fundamentals and business outlooks will likely play a very prominent role in directing stock traffic. There is a growing risk that more companies could warn that their outlooks for the rest of the year may not live up to expectations, given high input costs, cooling demand, and ongoing supply dislocations. We suspect stocks would find it difficult to gain their footing in such an environment. However, we believe current stock valuations reflect some degree of pending disappointment in upcoming corporate earnings and outlooks. The key question is how much disappointment is already accounted for in current stock prices.
As the second half begins, investors should continue to lean on the strategies that helped mitigate volatility in the first half. Focus on maintaining a disciplined and diversified portfolio of high-quality investments. Dividends also add a layer of income that can provide some relief in an otherwise sour market environment. In our view, Fixed Income offers attractive opportunities, as higher yields and less correlated movements with stocks enhance diversification properties. And don't discount the benefits of Alternative Strategies, which can help reduce volatility and mitigate risk across equity exposure.
What's ahead for investors this week
Finally, the week will see the release of the June Federal Open Market Committee (FOMC) minutes and the Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) on Wednesday. But the Bureau of Labor (BLS) June nonfarm payrolls report on Friday will receive all the market's attention. FactSet estimates call for June payrolls to decline to +272.5K from +390K in May. The unemployment rate is expected to hold steady at 3.6%, with hourly earnings unchanged at +0.3% month-over-month.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
Alternative investments cover a broad range of strategies and structures designed to be low or non-correlated to traditional equity and fixed-income markets with a long-term expectation of illiquidity. Alternative investments involve substantial risks and may be more volatile than traditional investments, making them more appropriate for investors with an above-average tolerance for risk.
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
Diversification, asset allocation and dollar cost averaging donot assure a profit or protect against loss.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
S&P Composite 1500 Index: Broad market portfolio representing the large cap, mid cap and small cap segments of the U.S. equity market. This combination addresses the needs of investors wanting broad exposure beyond the S&P 500. The S&P Composite 1500 is one of the composite index series created with core indices as building blocks to development tailored portfolio strategies.
The Bloomberg Commodity Index (BCOM) is measured based on an excess return basis and reflects the price movements of commodity futures.
The Bloomberg U.S. Universal Index contains U.S. dollar-dominated bonds that are investment-grade or high yield with remaining effective maturities between five and ten years - including government, corporate, securitized and emerging market bonds.
The MSCI Europe ex UK Index contains 348 constituents in large and mid cap segments across 14 developed market countries in Europe.
The MSCI United Kingdom Index contains 81 constituents in the large and mid cap segments of the UK market.
The MSCI All Country Asia Pacific ex Japan Index contains 1,284 constituents that cover the large and mid-cap segments across 4 of 5 developed markets countries (excluding Japan) and 8 emerging markets in the Asia Pacific region.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow-the estimate is based solely on the mathematical results of the model.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
Record-high inflation, surging energy prices, tightening monetary policies, slowing growth trends, weak investor/consumer sentiment, ongoing supply disruptions, a war in Ukraine, and China COVID-19 lockdowns colored the mostly negative tones seen across the market during the first half of the year. In addition, a choppy rise in U.S. Treasury yields during the first half was a meaningful headwind for equities, particularly across growth areas. In our view, investor sentiment and the direction of stock prices are unlikely to materially improve until inflation pressures show consistent moderation and the market believes the Federal Reserve is nearing a point where it can slow/stop its rate hiking cycle.
Stock and bond prices are both down in Q1; this unusual circumstance isn't expected to continue in Q2
Notably, the S&P 500 Index and Dow Jones Industrials Average finished their worst quarter since Q1'20, when the U.S. was in the throes of the pandemic and the global economy was shut down. Overall, the S&P 500 finished its worst first half of performance since 1970. In addition, the NASDAQ Composite closed its worst three-month stretch since the financial crisis in 2008.
In terms of the numbers, the S&P 500 closed the first half of the year down 20%, dropping by roughly 16% in the second quarter alone. The NASDAQ Composite slid almost 30% in the year's first half and fell over 22% in Q2. The Dow Jones Industrials Average lost roughly 14% in the first half and was lower by approximately 11% in the second quarter.
According to Bloomberg, more than $9 trillion in market value has been wiped out of the S&P 1500 Index, which measures U.S. small, mid, and large companies. Energy (+31.8%) was the only S&P 500 sector to finish the first half of the year higher, on the back of WTI crude soaring nearly +51% over the year's first six months.
Consumer Discretionary (down 32.8%) and Communication Services (down 30.2%) put in an abysmal first half as investors sold down high-growth areas of the market. In comparison, Utilities (down 0.6%), Consumer Staples (down 5.6%), and Health Care (down 8.3%) outperformed the broader market in the first half and helped mitigate volatility.
The 10-year U.S. Treasury yield jumped from 1.51% to 2.98% through the year's first six months. As a result, bond prices fell with the rise in interest rates during the first half. The Bloomberg U.S. Universal Index declined by 10.9% over the first six months of 2022. Stock and bond prices falling in tandem is a very unusual circumstance and one we do not expect to continue in the second half.
The Bloomberg Commodity Index rose 18.4% in the first half, driven by higher oil prices. However, the commodity benchmark fell nearly 11.0% in June, as oil prices came down from their recent highs, and several industrial commodities declined precipitously as recession fears mounted. Gold lost about 1% in the first half, while the U.S. Dollar Index rose +2.4%.
On a dollar basis, the MSCI Europe Ex UK Index dropped 24.2% through the first six months of the year and fell 15.7% in Q2. High recession probabilities across the region, slowing manufacturing/services activity, soaring energy prices due to the Ukraine war, weak sentiment, and a European Central Bank that looks increasingly behind the inflation curve were headwinds for stocks across the region. However, the MSCI United Kingdom Index fell just 8.8% in the first half and lost 10.5% in Q2. The UK economy has shown more resiliency in the face of elevated inflation pressures, as the Bank of England has been more proactive in attempting to stamp out higher prices with interest rate hikes.
Across Asia, the MSCI All Country Asia Pacific ex-Japan Index fell 11.5% through the first six months of the year. In Q2, the Index dropped just 3.9%. Easing China COVID-19 lockdown restrictions in the back half of the second quarter and a pickup in manufacturing activity across China helped place a bid under Chinese stocks last month. Also, improved sentiment around China easing its regulatory crackdown on Technology companies and tailwinds from modest policy support helped stock trends improve in the world's second-largest economy. Conversely, the MSCI Japan Index dropped 20.2% in the year's first half and lost 14.6% in Q2. Weak internal demand, a sinking yen, and disrupted supply chains weighed on stock performance.
In the U.S., recession odds continue to mount. Can stocks turn the page in the second half?
In the U.S., recession odds continue to mount. The Atlanta Federal Reserve's GDP Now forecast for the second quarter suggests growth in the U.S. economy will contract for the second straight quarter. And while consumer and business activity may be slowing faster than expected, stock prices often look past the present. In the previous eight times since WWII that the S&P 500 dropped by 15% or more in a quarter, the Index was higher over the next year. Similarly, the U.S. stock benchmark has declined by 20% or more in the first half of the year on seven other occasions. In every instance, the S&P 500 was higher a year later, and by a significant amount. In our view, by the time it's clear the U.S. is in, entering, or was able to avoid a recession, stocks most likely will have rebounded before the signals are obvious.
Yet, stocks could see more volatility in the second half as long as investors remain concerned about the path of inflation and interest rates, which looks pretty likely. Cooling core inflation in the second half could remove some pressure on the Federal Reserve to keep hiking rates aggressively. We believe stocks would react positively to such a development. But inflation pressures that prove sticky and keep the Fed aggressively pressing rates higher could keep stock prices on the defensive. In our view, investors should carefully watch the direction of the 2-Year U.S. Treasury yield. For instance, a declining 2-Year yield may signal higher recession odds and a Federal Reserve more willing to slow or pause its rate hiking cycle.
With the upcoming Q2 earnings season on the horizon, company fundamentals and business outlooks will likely play a very prominent role in directing stock traffic. There is a growing risk that more companies could warn that their outlooks for the rest of the year may not live up to expectations, given high input costs, cooling demand, and ongoing supply dislocations. We suspect stocks would find it difficult to gain their footing in such an environment. However, we believe current stock valuations reflect some degree of pending disappointment in upcoming corporate earnings and outlooks. The key question is how much disappointment is already accounted for in current stock prices.
As the second half begins, investors should continue to lean on the strategies that helped mitigate volatility in the first half. Focus on maintaining a disciplined and diversified portfolio of high-quality investments. Dividends also add a layer of income that can provide some relief in an otherwise sour market environment. In our view, Fixed Income offers attractive opportunities, as higher yields and less correlated movements with stocks enhance diversification properties. And don't discount the benefits of Alternative Strategies, which can help reduce volatility and mitigate risk across equity exposure.
What's ahead for investors this week
Finally, the week will see the release of the June Federal Open Market Committee (FOMC) minutes and the Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) on Wednesday. But the Bureau of Labor (BLS) June nonfarm payrolls report on Friday will receive all the market's attention. FactSet estimates call for June payrolls to decline to +272.5K from +390K in May. The unemployment rate is expected to hold steady at 3.6%, with hourly earnings unchanged at +0.3% month-over-month.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
Alternative investments cover a broad range of strategies and structures designed to be low or non-correlated to traditional equity and fixed-income markets with a long-term expectation of illiquidity. Alternative investments involve substantial risks and may be more volatile than traditional investments, making them more appropriate for investors with an above-average tolerance for risk.
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
Diversification, asset allocation and dollar cost averaging donot assure a profit or protect against loss.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
S&P Composite 1500 Index: Broad market portfolio representing the large cap, mid cap and small cap segments of the U.S. equity market. This combination addresses the needs of investors wanting broad exposure beyond the S&P 500. The S&P Composite 1500 is one of the composite index series created with core indices as building blocks to development tailored portfolio strategies.
The Bloomberg Commodity Index (BCOM) is measured based on an excess return basis and reflects the price movements of commodity futures.
The Bloomberg U.S. Universal Index contains U.S. dollar-dominated bonds that are investment-grade or high yield with remaining effective maturities between five and ten years - including government, corporate, securitized and emerging market bonds.
The MSCI Europe ex UK Index contains 348 constituents in large and mid cap segments across 14 developed market countries in Europe.
The MSCI United Kingdom Index contains 81 constituents in the large and mid cap segments of the UK market.
The MSCI All Country Asia Pacific ex Japan Index contains 1,284 constituents that cover the large and mid-cap segments across 4 of 5 developed markets countries (excluding Japan) and 8 emerging markets in the Asia Pacific region.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow-the estimate is based solely on the mathematical results of the model.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.