Week Ending 5/13/2022
It was another incredibly volatile week for stocks. Inflation readings came in hotter than expected on Wednesday, intensifying investor fears over the Federal Reserve’s efforts to curb prices by raising interest rates. Despite a bounce back in stocks Friday, all major averages still finished lower this week. The Dow fell 2.1% and notched its 7th straight week of losses. The tech-heavy Nasdaq dropped 2.8% on the week, while the S&P 500 slid 2.4%.
Under the hood, Consumer Staples was the only sector to squeak out a gain for the week, with all other sectors closing in the red with real estate leading to the downside, followed by financials and information technology.
The broad-based S&P is down about 16% from its high, hovering around bear market territory, defined as down 20% or more from its prior high. The Nasdaq is already in a bear market, down about 26% from the prior high.
As I’ve mentioned several times before, the stock market is always in a cycle-going up, then down, and back up again. Drawdowns are healthy for the market, where the stocks that have risen too fast and don’t have the fundamentals to sustain it during tough times will be hit the hardest and be weeded out, and the better, higher quality stocks will survive and be ready to continue to grow. We are in one of those moments in the stock market cycle, where the incredible gains over the last 2 years are being pulled back and stocks are being tested for their strength.
Historically, these “bear” markets have lasted a while before the all the froth had been purged and the market could start growing again. However, recent history has shown that the where the market historically has taken around 2 years to get back to where the bear market started, over the last 12-13 years no bounce back has taken longer than 6 months. The tech heavy Nasdaq 100 Index has had a positive return every year since 2008. The market reacts faster now than ever-both going up and going down-and this may be here for good. Which means during times like we find ourselves it is time to be patient and see this cycle through.
Another troubling occurrence this year has been the devastation in the bond market. It has done almost as bad as the stock market so far. But this is mainly attributable to the Fed’s tightening moves-though they’ve only done 2 increases so far. The dramatic change in bond prices is due to the very low rates for bonds, so these moves are starting at a very low level and therefore are percentagewise very significant. However, I believe that a lot of the carnage has been experienced, that the bond market knows we are in a rising rate environment, and the price changes may not be so dramatic going forward for a while.
Controlling inflation, like the Fed is responsible for and is (now) trying to do, is a hard thing. Think about it- jobs are abundant, wages are rising, and household and corporate balance sheets look strong. But the prices that companies are charging are growing and consumers are paying them-causing price inflation. But how do you reverse that, i.e., slowing the growth in the price of things? You have to slow the economy so prices are not growing so fast, but at the same time don’t slow it so much that the economy starts shrinking instead of just slowing. As an economics major, I know that there are millions of moving parts here and this is very difficult to do. And this takes time to pull off as well. Again, we are in a very challenging time in the investing world and it will be fascinating to watch how this plays out.