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Hopes for a turnaround remain even as markets decline again for back end of 2022

The first half of 2022 has been one of the worst six months for Wall Street in decades. But analysts think the second half shows some promise of a turnaround on equities.

MANHATTAN (CN) — The year so far hasn’t been pleasant for Wall Street, which has lost considerable ground as inflation woes and recession worries have taken hold. For the first day of July at least, markets pulled out a win.

Since the start of the year, all three U.S. indices have lost a tremendous amount of value and had their worst starting six months in more than 50 years. The S&P 500, for example, is down more than 21% since the beginning of the year, its worst first-half outing since 1970. Things are even worse for the Nasdaq, which has shed 30% of its value, that index’s worst outing since the dot-com bubble burst.

The losses so far in 2022 have all but wiped out the gains seen in 2021. Last year, the Dow gained about 5,700 points. So far this year, however, it has lost 5,224 points. The S&P 500 gained about 1,000 points in 2021, but it has declined 953 points to date in 2022. The Nasdaq netted 2,686 points last year only to shed a whopping 4,725 points so far this year.

“Currently we are seeing the turmoil from rising interest rates at the fastest level in years, combined with high inflation and the war in Ukraine,” Daniel Rodan of Tower Bridge Advisors wrote. “The first half of the year has not been kind to most investors, but looking forward there will be buying opportunities at some point.”

This week was not a stellar start to the second half of the year, though by the week’s end the markets showed promise. Dow Jones Industrial Average lost about 403 points since last Friday’s closing bell and gained 322 points during Friday’s trading. The S&P 500 and Nasdaq saw similar weekly losses of 86 points and 480 points, respectively, and moderate gains on Friday.

Investors are still wholly focused on inflation, but the specter of a recession has also shadowed both equities and bond markets, particularly with the Federal Reserve keeping its foot on the gas for interest rate hikes.

“While our models suggest that recession risks are still low, the Fed’s rapid policy tightening will trigger a marked slowdown in economic growth, which means that the risks are likely to build over the coming months,” Michael Pearce, an analyst at Capital Economics, wrote in an investor’s note. “But suggestions that a recession is imminent or inevitable are well wide of the mark.”

Earlier in the week, Fed Chair Jerome Powell told attendees at a European Central Bank conference that the Fed would continue to raise interest rates even if it meant slower growth or bringing on a possible recession. “Is there a risk we go too far? Certainly there’s a risk,” Powell reportedly said. “The bigger mistake to make … would be to fail to restore price stability.”

Data points this week have been sparse, but those that have come out failed to offer much positive news for investors. On Friday the ISM manufacturing index showed another drop as new orders were reduced again last month, its lowest since June 2020.

“For now, production is holding up,” wrote James Knightley, chief international economist at ING. “Slowdown worries have already been highlighted this week by the large downward revisions to consumer spending data and the outright contraction in May, and today’s manufacturing numbers suggest that weakness is spreading to other parts of the economy.”

Knightley says the report is unlikely to improve investors’ mood, but he pointed out the “prices paid” in the index have slowed for the third consecutive month and supplier delivery times have moderated, which he says suggests supply-chain issues are easing.

Other indicators remain negative. A survey released by the U.S. Chamber of Commerce earlier in the week found 88% of small businesses say they are concerned about the impact of inflation on their bottom lines, with nearly half of respondents saying they are “very concerned” about inflation.

Even so, the survey also saw an increase to a pandemic-era high score of 66.8, with two-thirds of respondents saying their business was in good health during the second quarter of 2022, a 5-point increase from the first quarter.

“Historic inflation is top-of-mine and deeply troubling to small businesses right now,” said U.S. Chamber of Commerce Vice President Tom Sullivan. “But at the same time, there is confidence among small business owners that customer demand will remain strong, and this quarter’s index shows they want to hire and plan on meeting that demand in the coming months.”

On Tuesday, the consumer confidence survey released by The Conference Board fell for a second consecutive month to 98.7 points in June, its lowest reading since early 2021. Expectations are now well below 80 on the survey, which indicates consumers expect weak growth during the second half of this year and a possible recession by 2023.

“Right now we are at an inflection point in the economy, where actual spending and economic activity is still positive,” Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, said after the survey was released on Tuesday. “If we are able to avoid a recession then the stock market is fairly valued. However, if we do go into recession then we would expect the lows for the year haven’t been hit yet.”

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