SCOTT STILLMAN,
CFP®, CLU®

Markets rarely give us clear skies, and there are always threats to watch for on the horizon. But the right preparation, context, and support can help us navigate what lies ahead. So far, this year hasn’t seen a full-blown crisis like 2008-2009 or 2020, but the ride has been very bumpy. We may not be flying into a storm, but there’s been plenty of turbulence. How businesses, households, and central banks steer through the rough air will set the tone for markets over the second half of 2022.

The sources of turbulence are clear. A global economy that was already vulnerable to inflation from supply chain disruptions, tight labor markets, excess stimulus, and loose monetary policy came under more pressure when Russian aggression in Ukraine added sharply rising commodity prices and Europe on the brink of recession to the mix. The effects have included renewed pressure on interest rates, which hurt bond investors and contributed to tightening financial conditions, and a much more aggressive stance by the Federal Reserve (Fed) and other global central banks. Add in the typical market challenges of a midterm election year and the third year of a bull market, and it’s no surprise it’s been a bumpy ride.

Understandably, rising prices, slowing economic growth, and a challenging first half for both stocks and bonds have many investors on edge, and fatigue from more than two years of COVID-19 measures doesn’t make it any easier. But the markets are always forward looking, so it’s important to remain focused on what lies ahead. There will most certainly be challenges, but there are also some tailwinds from a strong job market, still resilient businesses, and the likelihood that inflation will soon start to slow. Markets historically can even get a little lift from lower uncertainty around elections as midterms approach.

Turbulence cannot be completely avoided, but it also need not deter us from making progress toward our financial goals. LPL Research’s Midyear Outlook 2022: Navigating Turbulence is designed to help you assess conditions over the second half of the year, alert you to the challenges that may still lie ahead, and help you find the smoothest path for making continued progress toward your destination. When times are turbulent, the surest path toward progress remains sound financial advice from dedicated professionals who have logged many hours in similar conditions. Please contact me if you have any questions.

As we move into spring and leave behind the last signs of a long winter, many worries from a chilly start to the year for markets, unfortunately, are still with us. The S&P 500 Index had its worst April in more than 40 years, leaving the index down over 13% for the year. Previously highflying stocks have come back to earth, with many of them cut in half or more. And bonds, which have historically provided support during times of stock market volatility, have done little to protect portfolios.

The concerns that have contributed to the poor start are well-known. Historically high inflation, supply chains disruptions, China in another lockdown, geopolitical concerns, an aggressive Federal Reserve Bank (Fed) rate hiking campaign, and soaring yields have all contributed to the worries. Not to mention economic growth worries are spreading after the 1.4% decline in gross domestic product (GDP) during the first quarter.

Just as April’s dark storm clouds are often chased away by a brighter May, we remain optimistic that more sunshine could be coming. Yes, the GDP report showed an economy that contracted in the first quarter, but that was mainly due to drags on inventory and trade, while more important parts of the economy like consumer spending, housing, and private sector investment all accelerated compared to the fourth quarter. Additionally, 2011 and 2014 both saw negative first quarter GDP prints, followed by big rebounds in the second quarter to avoid recessions. We expect GDP to grow approximately 3% this year and avoid a recession thanks to a strong consumer and a healthy corporate earnings backdrop.

Inflation could be nearing a peak, offering a potential driver for improved confidence in the second half of this year. Used car and truck prices have come down significantly over the past two months, while shipping costs have also dropped nicely. These two bits of data suggest inflation may be past its peak, even if it may take a while for it to get back to normal. Add in supply chain normalization and the potential for a ceasefire in Ukraine to remove some upward pressure on commodities, and the Fed may not hike rates nine times as the bond market is currently pricing in.

From its early January peak, the S&P 500 has corrected 13.9% (as of April 29), right in line with the average yearly correction since 1980 of 14.0%. As uncomfortable as this year has been, this action is actually about average. Additionally, midterm years tend to be even more volatile, correcting more than 17% on average, but the index rebounded 32% on average in the 12 months following those midterm year lows. Lastly, the last 21 times the S&P 500 has been down double-digits since 1980, the index rallied back to end the year positive 12 times. Don’t give up hope yet.

The investing climate is quite challenging, but based on historical trends, we believe patience may be rewarded. Even if there may be some downside in the short term, consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations, and current levels may end up being an attractive entry point for suitable investors.

Please contact me if you have any questions.

It has been a turbulent 2022 so far for investors. The S&P 500 Index is on track for its worst April in more than 40 years, the Nasdaq entered a bear market on April 26 with its more than 20% decline, and bonds, which typically provide ballast for diversified portfolios during periods of stock market volatility, have not protected.

Markets face a number of threats. The COVID-19 pandemic has contributed to a disappointing start to the year for the U.S. economy as evidenced by the -1.4% growth in gross domestic product (GDP) reported on April 28. COVID-19 continues to disrupt global supply chains amid intermittent lockdowns in some of China’s largest cities. Russia’s devastating assault on Ukraine, arguably the biggest geopolitical threat in Europe since WWII, has added to the worst inflation problem in the U.S. since the 1970s. The bond market is pricing in nine more Federal Reserve (Fed) rate hikes, after looking for only three when the year began. That’s a lot for investors to digest.

But during a market correction it’s easy to forget that this volatility is actually quite normal.

• The S&P 500 Index has fallen 13% peak to trough this year, below the 14% average of all years.
• During midterm election years, the average stock market correction is 17%, but stocks rebounded 32% on average in the 12 months following those midterm year lows.
• Of the last 21 times the S&P 500 has been down double-digits since 1980, stocks rallied back to end the year positive 12 times.
• During those 12 positive years, the average gain has been a stellar 17%.

We will admit a double-digit gain in 2022 is unlikely, but a U.S. consumer willing and able to spend, which makes recession unlikely in the near term, and steadily rising corporate profits still make a positive year for stocks in 2022 more likely than not, in our view.

Inflation remains a big concern, but a number of factors could put downward pressure on prices beginning this summer. On the supply side, where most of the problem lies, supply chain normalization and more job-seekers coming off the sidelines could help ease pressure on goods prices and wages. An eventual cease-fire in Ukraine could remove some of the upward pressure on commodity prices. On the demand side, higher interest rates can help cool housing. The bond market is already doing some of the Fed’s work with the 10-year Treasury yield nearly doubling in four months to 2.8%. These factors could easily cut headline consumer inflation in half by year-end from the current annual pace of 8.5%.

The outlook for corporate profits remains quite positive and may help prevent stocks from pulling back much further. With about 180 S&P 500 companies having reported, double-digit earnings growth appears within reach while analysts’ estimates for 2022 have continued to rise. These numbers are excellent considering slow economic growth, supply chain disruptions, and inflationary pressures.

The investing climate is quite challenging, but history suggests patience will be rewarded. Even if there may be some downside in the short term, consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations. Our belief is that current levels will end up being an attractive entry point.

Please contact me if you have any questions.

As we move into spring and leave behind the last signs of a long winter, many worries from a chilly start to the year for markets, unfortunately, are still with us. The S&P 500 Index had its worst April in more than 40 years, leaving the index down over 13% for the year. Previously highflying stocks have come back to earth, with many of them cut in half or more. And bonds, which have historically provided support during times of stock market volatility, have done little to protect portfolios.

The concerns that have contributed to the poor start are well-known. Historically high inflation, supply chains disruptions, China in another lockdown, geopolitical concerns, an aggressive Federal Reserve Bank (Fed) rate hiking campaign, and soaring yields have all contributed to the worries. Not to mention economic growth worries are spreading after the 1.4% decline in gross domestic product (GDP) during the first quarter.

Just as April’s dark storm clouds are often chased away by a brighter May, we remain optimistic that more sunshine could be coming. Yes, the GDP report showed an economy that contracted in the first quarter, but that was mainly due to drags on inventory and trade, while more important parts of the economy like consumer spending, housing, and private sector investment all accelerated compared to the fourth quarter. Additionally, 2011 and 2014 both saw negative first quarter GDP prints, followed by big rebounds in the second quarter to avoid recessions. We expect GDP to grow approximately 3% this year and avoid a recession thanks to a strong consumer and a healthy corporate earnings backdrop.

Inflation could be nearing a peak, offering a potential driver for improved confidence in the second half of this year. Used car and truck prices have come down significantly over the past two months, while shipping costs have also dropped nicely. These two bits of data suggest inflation may be past its peak, even if it may take a while for it to get back to normal. Add in supply chain normalization and the potential for a ceasefire in Ukraine to remove some upward pressure on commodities, and the Fed may not hike rates nine times as the bond market is currently pricing in.

From its early January peak, the S&P 500 has corrected 13.9% (as of April 29), right in line with the average yearly correction since 1980 of 14.0%. As uncomfortable as this year has been, this action is actually about average. Additionally, midterm years tend to be even more volatile, correcting more than 17% on average, but the index rebounded 32% on average in the 12 months following those midterm year lows. Lastly, the last 21 times the S&P 500 has been down double-digits since 1980, the index rallied back to end the year positive 12 times. Don’t give up hope yet.

The investing climate is quite challenging, but based on historical trends, we believe patience may be rewarded. Even if there may be some downside in the short term, consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations, and current levels may end up being an attractive entry point for suitable investors.

Please contact me if you have any questions.