Americans with stock portfolios or retirement investment plans would probably prefer to forget about the past six months.
The S&P 500, Wall Street’s broad benchmark for many equity funds, was on pace Thursday afternoon for a 20% loss through the end of June after starting the year at a record high. This is the worst start to the year for equities in decades.
Investors have grappled with uncertainty and fear this year following a sharp rise in interest rates as the Federal Reserve and other central banks struggled to rein in the highest inflation in over 40 years. Higher rates can lower inflation, but they also slow the economy, increasing the risk of recession. This has helped drive down the value of stocks, bonds, cryptocurrencies, and other investments.
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On June 13, the S&P 500 fell into a bear market, dropping more than 20% below the all-time high it set earlier this year. It’s now 20.4% below that all-time high on Jan. 3, back to where it was at the end of 2020.
The Fed has been at the center of the market pullback, raising its key short-term interest rates three times this year. Its most recent rise earlier this month was triple the usual amount and its biggest rise since 1994. Bigger increases are almost certain.
“You can argue that they’re just playing the hand that was dealt to them, but the reality is that they got caught a little behind the curve and their pivot to a much more aggressive political stance was why the market sold out,” said Ross Mayfield, investment strategist at Baird.
One winner, many losers
Tech companies, retailers and other stocks that have been big winners from the pandemic have been among the biggest losers this year. This includes a drop of more than 35% for Tesla, a drop of 70% for Netflix and a drop of more than 50% for Meta, the parent of Facebook.
Rising bond yields made these stocks look overvalued relative to less risky segments of the market, such as utilities, homewares makers and healthcare companies. These are often referred to as “value” stocks to distinguish them from stocks of high-growth companies.
Energy is the lone winner this year among the 11 S&P 500 sectors. The sector is up 29.9% so far, buoyed by soaring oil and gasoline prices.
Of the 25 stocks in the index that have risen more than 20% this year, all but eight are energy companies.
Pain pump, energy gain
Soaring prices at the pump are the result of a classic squeeze.
Demand for gasoline and other petroleum products surged after the economy emerged from the cavern created by the coronavirus. At the same time, crude oil and gasoline supplies remained tight. Ukraine’s invasion has upended a key energy-producing region of the world, with sanctions blocking oil from Russia, which ranked third in the world for oil production at the end of last year.
Meanwhile, refineries have less capacity to turn oil into gasoline in the United States after several shutdowns during the pandemic. US refining capacity has fallen for two straight years, according to the US Energy Information Administration.
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As a result, gasoline prices have hit record highs this year, with the national average for a gallon of regular fuel topping $5 a gallon earlier this month, according to AAA.
This means hardship for many drivers, but a nice reward for investors betting on energy stocks.
For such strength to continue, however, concerns about a recession should subside. Recessions have historically driven down oil prices by destroying demand. And over the past week, shares of energy companies have fallen even more than oil prices, with some investors growing fearful of such a scenario, according to Barclays strategists.
Sometimes even the calm of the group loses its cool.
Bonds are supposed to be the most stable and reliable part of a portfolio. But not only have they slammed investors with losses in the first half of this year, they are on course for one of their worst performances in history.
High-quality and investment-grade bonds were down 11.3% for the first six months of 2022 on Monday. Any down year is a notable thing for bonds. The Bloomberg US Aggregate Index, which many bond funds use as a benchmark, has only seen four years of losses on record highs dating back to 1976.
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This year’s losses are entirely the result of high inflation and the Fed’s response to it. Inflation is generally anathema to investors because it erodes the value of buying fixed-payment bonds they will make in the future.
The 10-year Treasury yield has already more than doubled this year. It stood at 2.98% on Thursday afternoon. More pressure could be on the way as the Fed continues to hike rates, although some analysts say the worst of the damage may be over.
Strategists at the Wells Fargo Investment Institute recently raised their forecast for where the 10-year Treasury will end this year to a range of 3.25% to 3.75%. But they also see it moderating next year to a range of 2.75% to 3.25%.
Proponents of cryptocurrencies have touted them as, among other things, a good hedge against inflation and a safe haven when the stock market crashes. They haven’t been either of those things this year.
Bitcoin has fallen from nearly $69,000 in November to under $20,000 this month, in part due to the same forces that drove stocks down: inflation and rising interest rates.
Certain events unique to the cryptocurrency industry have also factored in and eroded investor confidence. A so-called stablecoin collapsed, costing investors around $40 billion. A hedge fund dedicated to digital assets has reportedly been threatened with liquidation. And some bank-like companies, which take cryptocurrencies as deposits and then lend them out, have suspended withdrawals as they work to shore up their finances.