The Fed met this week and as expected, they hiked interest rates by 0.75%.
I believe this was already baked into the cake, as they say. The Fed was late to this party and should have begun hiking rates last year but is now committed to fighting inflation as best they can. This is the fourth hike so far in 2022 and the first time in ages that they raised rates by 0.75% back-to-back. I am rooting for them to massage rates so they don’t shock the economy.
This is a big week for earnings report(s) with 1/3 of all companies in the S&P 500 reporting and so far, earnings are looking good.
The second quarter GDP was released on Thursday, and we had another contraction of -0.9%. This is on top of the first quarter -1.6% reading. Normally, this would be considered the start of a recession under the old definition, “a period of two successive quarters where trade and industrial activity are reduced”, but the National Bureau of Economic Research (NBER) has recently changed the definition to be “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”.
The S&P is off its high by -14%. To put it in perspective, 2 ½ years ago at the start of Covid-19 it was down -34%, and 15 years ago at the end of the financial crisis, it was down -50%. Over the last 15 years, investors have experienced two bear markets, both of which recovered their losses and went on to make new all-time highs. In hindsight, investors have asked themselves, “what a buying opportunity, why was I afraid to invest some cash?”
I believe that in time, investors will look back at this current correction and ask the same question.
The average annual return over the last 15 years for the S&P 500 was +9%, Nasdaq +14% and bonds +3%. Not bad considering how many times investors always think the next correction, bear market and/or recession will be different, but it’s never really different, it just seems that way. The world hasn’t ended yet and I’m pretty sure it won’t end now.
There’s a saying, “a recession is when your neighbor loses their job, and a depression is when you lose yours”. Time will tell, or I should say NBER will inform us and I’m guessing it will be late this year. We don’t necessarily need to enter a recession, although the consensus on Wall Street is we will.
The good news is that the S&P 500 has bounced off its low by almost +8%, there are 6 million unemployed people and 11 million available jobs, 3.6% unemployment rate is near historic lows, corporate earnings are good and most of all, consumers are spending money. If there is a recession, it may be short-lived and shallow.
I believe that there is a lot of bad news built into this market and all we need is some more good news before the markets start to recover their losses. The markets will go on to make new all-time highs and when it does, investors will want to be invested and not miss out on recovering their losses. So far this week, things are looking up.
Bouchey Financial Group has offices in Saratoga Springs and Historic Downtown Troy.