The first six months of 2022 have been devastating for both stocks and bonds; US stocks were down 15-24%, depending on the index.
Unlike other corrections or bear markets bonds were also down 10%. Bitcoin was down 70% from its peak, showing the carnage in the speculators den.
Where we are now:
Stock market valuation (price-to-earnings ratio) is slightly below the historical average and is now 15.7x, down from 23.0x at the recent peak. The rise in interest rates and concerns over corporate earnings have caused this severe sell off in the markets. Predicting a market bottom during any market selloff is impossible to do. However, current prices may prove to be quite attractive in two years once looking back.
The economy is clearly slowing down due to higher interest rates and inflation. The Federal Reserve “FED” is committed in bringing down inflation and may very well over play the inflation cycle by increasing interest rates to the point of causing a recession. We think a recession is likely to unfold which will reduce corporate earnings and their expectations for 2023. The market may decline further. However once inflation is showing clear signs of abating, the FED will likely cease increasing interest rates and may reduce interest rates to spur the next expansion cycle.
The stock market may have established a bottom if the US economy averts a recession.
The Dow Jones Industrial Average “DOW” has been trading in the 31,000 to 33,000 range. The stock markets valuation is back to average with the price-to-earnings ratio of 15-16x.
We are optimistic about the stock market for the next 18 months! Yes, we are!
Investor and consumer sentiment indices are in “extreme negative” territory. And when this occurs, almost without exception, markets reverse and turn positive over the subsequent 18 months. When the negative components of the outlook begin to turn positive, the stock market typically responds positively and swiftly.
Richard S. Lawrence, CFA / July 12, 2022SCHEDULE A CONSULTATION
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).
PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES!