Tough first half on the markets. On Wall Street, the S&P 500 has not had such a disappointment since the first six months of 1970, which preceded the decade of the great inflation.
At the end of the first half of the year, Wall Street’s benchmark index was down 21% from its peak on January 4, to end this six-month period in ” bear market “. The Nasdaq, made up of highly interest rate sensitive technology stocks, fared worse with an underperformance of more than 30%. And what about bitcoin, dominating the cryptocurrency market, which shows a 60% plunge and starts the second half below US$20,000.
The investment firm LPL Financial has identified only three more difficult semesters than the one that has just ended for the S&P 500. Either in 1932 (Great Depression), in 1940 (Second World War) and in 1970 (Vietnam War, recession). The 1970s were marked by galloping inflation that doubled from 8.8% in 1973 to 12% at the end of the 1970s and 14% at the start of the major recession of 1980-1982. A decade dominated by an unbridled expansion of the money supply which is juxtaposed with a first oil shock, in 1973, followed by a second, in 1979-1980. The whole having been coated with a disastrous policy of controlling prices and wages.
For its part, inflation in the United States in May posted its strongest rise in 40 years.
On Bay Street, the S&P/TSX, tainted by oil and materials, did better with a half-year loss of 11%. The index has accelerated its fall in recent weeks, however, as fears of a recession have replaced the inflationary slippage in the psyche of investors. This shift in attention diverts attention to the statistics that make it possible to expect less “aggressive” intervention by central banks.
“The idea that is spreading is that bad news will become good news for equities,” says Jack Ablin, of Cresset Capital, in a text from Agence France-Presse.
According to this reasoning, “bad economic news will help keep interest rates low and lead to lower demand and more contained inflation”.
During this first half, the US economy entered the stagflation zone. Inflation, which remains stubbornly high, cohabits with the proliferation of indicators which seem to reveal a slowdown in economic activity. The Conference Board recently revealed that 75% of the 750 bosses questioned in the world considered either that a recession was looming on the horizon, or that it was already effective. We note that the American GDP contracted in the first quarter, or 1.6%, according to the last reading revised downwards, and that the Atlanta branch of the Federal Reserve revised its growth rate forecast for the second quarter.
Edward Moya, market analyst for the specialized brokerage firm OANDA, points out that the probability of a recession has increased with the latest ISM manufacturing index which fell from 56.1 to 53 points to fall to its lowest in two years. This probability is now 50%, down from 30% previously.
The first half was placed under the effect of the increase in the cost of money. The Federal Reserve added 150 points to its key rate, and the Bank of Canada, 125 points. With the game of expectations and the end of quantitative easing, monetary tightening has spread across the yield curve. In the United States, the rate on ten-year US Treasury bills — a benchmark for the mortgage rate — more than doubled, from 1.5% to 3.5%. The surge was more marked on the two-year term, with the rate rising from 0.7 to 3.5%. The 2-10 year portion of the yield curve has even inverted a few times, an inversion that suggests a recession in the next 12-18 months could be on the radar, writes analyst Ipek Ozkardeskaya, of Swissquote Bank.
For the rest of things, the key remains the control of inflation and the (low) possibility that central banks know how to maneuver a soft landing. As for the teaching of history, it depends.
LPL Financial observed that the average one-year return from the trough of the correction is 23% — 37.5% over two years — since 1980. According to a previously published National Bank overview, the S&P 500 has experienced 11 episodes of correction of 20% or more (peak to trough) since 1956, eight of which were accompanied by a recession. The decline extends over 297 days, on average, if it is accompanied by a recession, 141 days otherwise. The total loss of the index reaches 37% and 28% respectively.
We are currently at 177 days.