The Perfect Storm

So far this year, the stock markets have achieved the worst first half of a year since 1970 and the Treasury Treasury bond market is having its worst performance ever. Numerous individual stocks are experiencing 90% declines, crypto-currencies stumbled and inflation is like a run-away train.

With global central banks, including the U.S. Federal Reserve, belatedly attempting to combat inflation with higher interest rates and tightened financial conditions despite the rapidly slowing economic growth, more volatility is likely ahead of us in the coming months.

As a result, investors are experiencing the “perfect storm” of a bear market environment. The sober reality of the high current inflation, rising borrowing costs and slowing economic growth makes it difficult to be optimistic about stocks near term.

The Wall Street Journal reports that “the good news for investors is that markets haven’t always done poorly after suffering big losses in the first half of the year. In fact, history shows they have often done the opposite. When the S&P 500 has fallen at least 15% the first 6 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.”

While we would love to see history repeat itself, the special circumstances surrounding the global response to COVID-19 could deepen the current slump in equities and delay a rally until the Fed pauses or ends the current tightening cycle.

Until the actions of the Federal Reserve indicate otherwise, we will continue to maintain large cash positions, allowing our client portfolios to weather the market storms and readying the sails for when the winds change.