We just closed out the first half of 2022 and it was considered one of the worst in history for both stocks and bonds. Stocks had their worst first half in 50 years, according to Time, and bonds had their worst performance since 1788! Yes, we have to go all the way back to the age of Alexander Hamilton to get something as bad as this. For a traditional balanced portfolio of stocks and bonds, there was unfortunately no escaping the damage, as bonds failed in their role of providing stability when we needed it most.
It’s easy to find reasons to be pessimistic: inflation is at 40 year highs, housing affordability is the lowest it’s been in decades, and to add to that, mortgage rates have spiked to keep pace with the Federal Reserve’s interest rate increases, which will eventually slow the economy, and perhaps even tip it into recession. As a result, investors are about as pessimistic as during the Covid crash of 2020 and consumer confidence has plunged to all time lows:
But wait! In the depths of despair, a silver lining can be found. What we’ve seen historically is that when consumers and investors are pessimistic, a funny thing happens – future returns for stocks tend to become more attractive. And like last year, when consumers and investors were quite optimistic, the opposite happens – future returns tend to become more disappointing.
According to the graph above, after the historical troughs of consumer sentiment, the subsequent 12-month return of the S&P 500 was 24.9%, while after the historical peaks, the subsequent returns were 4.1%. I know it’s a bit scary to own stocks right now, but if history is any guide, this may be one of the better times in history to have more exposure to stocks. At some point, the economy will stabilize and inflation will cool down, and once that possibility starts to become the focus of investors, stocks will likely start to make their recovery, and it may do so at rates above the historical averages.
Remember, this is NOT financial advice! Past performance is no guarantee of future results, and investments involve risk and are not guaranteed to appreciate. Rainier Trinidad, CFA, is the President and Portfolio Manager at Parabolic Asset Management in San Diego.