So far this year, the market averages have headed lower, and by midyear it seems likely that 2022’s first half will have been among the worst starts since 1950. The causes: high inflation and turmoil in Ukraine, abetted by stock valuations that last year had swelled toward the upper end of the historic range.
Rich valuations alone do not turn markets upside down, but they do set the stage for retreats when there are problematic economic and/or geopolitical developments. Nevertheless, most sectors of the economy are in relatively good shape and interest rates are still well below the levels that had prevailed for many years. Where things stand now in Ukraine is another story, but the market appears to have absorbed the initial shock of what is happening there.
Over the last 72 years, there have been eight times when the S&P Index dropped more than 10% during the first six months of the year. The biggest drops took place in 1962 and 1970, when the index fell 23.5% and 21.0%, respectively. Since then, the pullbacks, including this year’s, have not exceeded the mid-teens.
What followed those weak periods is more important. In 1962, 1970, and 1982, the index had recovered by an average of 22.4% by the end of those years, but in 1973, 1974, 2002, and 2008, the averages continued to fall after midyear.
The OPEC oil embargo was a key source of the weakness in 1973 and 1974. In 2002, the markets were still under pressure from the remnants of the dot.com fiasco. The culprit in 2008 was the financial crisis.
With that brief refresher of history, it’s tempting to think that a resumption of market strength is just around the corner, but sometimes the recovery takes longer. Still, even when the pickup from the lows of those years had been delayed, it most assuredly did take place.
In the wake of those difficult times, the follow-up resurgences happened in 1975, 2003, and 2008, three years when the average gain was 29.0%. Given the magnitude of those gains, patience was certainly well rewarded.
It seems likely that the recent turbulence will continue, albeit at a more moderate level. The root cause of market volatility is uncertainty. Uncertainty about interest rates, for example, is concerning, but the knowledge of how the Fed plans to make the adjustments needed is part of the process of rebuilding market confidence.
N. Russell Wayne, CFP®
Sound Asset Management Inc.
Weston, CT 06883
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