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WeekWatch -‘As the second quarter of 2022 came to a close, US markets reported their worst half yearly performance since 1970’ July 22

WeekWatch -‘As the second quarter of 2022 came to a close, US markets reported their worst half yearly performance since 1970’ July 22

As the second quarter of 2022 came to a close, US markets reported their worst half yearly performance since 1970, as rising inflation, higher interest rates, and Russia’s invasion of Ukraine created a challenging environment for investors.

Over the first six months of the year, the S&P 500 fell almost 20%, while the tech-heavy NASDAQ plummeted 29%.

In such an environment, few sectors performed well. Consumer and technology businesses have generally struggled the most, while energy, financials and healthcare were the top performers.

This has some similarity to the 1970s (when markets fell as inflation reached similar highs), noted Tony DeSpirito from BlackRock.

But “while the backdrop is different today, we do believe these three sectors could outpace the broader market once again,” he commented, “with financials potentially doing even better in this cycle, given stronger bank balance sheets after restructuring and rigorous stress testing in the wake of the Great Financial Crisis,” he added.

Last week, early gains gave way to larger falls, as the final revision of US Q1 2022 GDP data was downgraded on weaker consumer activity. Overall, the S&P 500 ended the week down 2.2%.

European shares also struggled, as headline CPI inflation in the Eurozone reached a record 8.6%. This was above expectations. The European Central Bank is generally expected to start increasing interest rates in the future, while the continent continues to grapple with its reliance on Russian energy fuel. In total the MSCI Europe ex. UK fell 1.26% over the week, while the German DAX Index and French CAC 40 both fell over 2%.

The FTSE 100 fell 0.6%, meaning that overall, the index was down 2.9% for the first 6 months of the year – a substantial outperformance compared to its US peers, partly thanks to the sector mix of the FTSE 100. This was despite a notable fall in June, as investors began to worry about the increasing likelihood of a recession.

These recession fears have grown louder in recent weeks, as a number of economic indicators have suggested Western markets are slowing down, thanks in part to reduced consumer spending and the rising cost of living.

Kristina Hooper, Chief Global Market Strategist at Invesco is not alone when she suggests: “While pandemic-driven factors continue to complicate cycle analysis, we nevertheless see higher inflation and slowing growth, indicating that we may be late in the business cycle. The remainder of 2022 is likely to bring a substantial slowdown in growth for major developed economies.”

“Whether the ultimate outcome is recession or stagflation, the implications for corporate earnings are clearly negative,” added Alex Tedder, Head of Global and US Equities at Schroders. “Margins are likely to experience pressure over the coming months as cost pressures become apparent and top-line revenue growth begins to slow.”

While the past six months have been difficult, and there is likely further volatility ahead, it remains important to retain a long-term outlook.

For active fund managers, volatility has the potential to create buying opportunities.

They will have thoroughly researched companies and analysed their long-term earnings potential. This will give them a good idea of what a company is worth, and how much they want to pay for shares.

With prices falling, more and more of these companies will be trading below this price, giving them the opportunity to buy. And while this might result in some short-term falls, it gives them the opportunity to buy future profits at a discounted prices, with the prospect of making even better long term returns.

While the short-term falls can feel uncomfortable, remaining invested is the best option.

As Darren Johnson, one of our Senior Investment Consultants, points out: “If you’d said in the summer of 2012, “I know exactly what’s going to be happening. The Eurozone crisis will go on for years. Brexit will happen. China will have a hard or soft landing depending on what you how you interpret it. We’ll have the biggest global pandemic in a century, the steepest economic decline in history, war in Europe, yet markets have grown substantially over this period,” most people would have thought you were mad. And yet, markets have done that despite these events – not because of, but despite of – these events.”

He adds: “The biggest probability of success is to remain invested. The biggest guarantee of failure right now would be to put your money in cash where inflation – which is currently hovering at 9.1% – will erode the value of your money away.”

BlackRock, Invesco and Schroders are fund managers for St. James’s Place.

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