Markets Remain Volatile

Markets were very volatile in May 2022 but ended up slightly positive for the month.  Year-to-date returns are still in negative territory as inflation and the potential effects on the economy and businesses continue to be the main source of concern. 

After a very difficult April, markets continued their downward trend until a strong end-of-month rally brought markets back to near flattish levels in May.  Volatility has been one of the few consistencies in the markets this year.  Through May, the market has experienced 54 days of greater than 1% up or down movements compared to 55 all of last year.1 In the bond markets, interest rates have fluctuated leading bonds to experience stock-like volatility in 2022.  Long-term US treasuries often looked at as a source of safety, are down over 20% year to date.2

The S&P 500 is now in a slight decline over the last 12 months.  The year-to-date decline has come off of all-time highs in early January.  Companies have recently reported their first-quarter earnings and results were generally above expectations.  As of May 27, 97% of S&P 500 companies reported earnings with 77% of them beating expectations.  As a result of their reports and subsequent outlooks, estimates for the S&P 500 earnings have risen throughout the year.  Because earnings are rising but prices are falling, stock valuations are getting cheaper and are now nearing the 10-year average after being elevated earlier in the year.  Stocks are not cheap, and valuations could come down further, but company reports and their outlooks on the future suggest that earnings could continue to trend higher for the remainder of the year and into 2023.3 

The bond market, despite a positive May, is still down more than the S&P 500 over the past year.  Interest rates have been the primary factor for this weakness as both 2-year and 10-year interest rates have risen significantly from May 2021.  Recently, as there has been more concern regarding the potential for recession, the premium to take on default risk (credit spread) has risen as well.  This is also a headwind to bond prices as investors demand more yield to take on that risk. 

As we look to the second half of the year, inflation is still the key concern and driver for future performance.  If inflation (including oil prices) begins to trend downward, this will cascade into greater spending power for consumers and less need for the Federal Reserve to act aggressively to curb price growth.  These should be beneficial to the economy and also to company earnings growth.  Conversely, if inflation (including oil prices) were to accelerate from current levels, the Federal Reserve would likely have to be more aggressive in raising interest rates and consumers would have less discretionary spending ability.  Both of these events could create recessionary conditions and likely lower corporate earnings growth. 

While we can never perfectly predict these events, there are early signs that the inflation rate may be peaking.  If that is the case, and we can avoid a significant decline in growth as a result, this could provide some lift to stocks after a difficult first half of the year.  Now, even if inflation begins to decline, it doesn’t mean that concerns in the markets go away.  Investors are forward looking, and there are always things on the horizon that create the potential for new fears to replace our current fears. 

The way to battle the constant fears is to have a plan and approach that is both diversified between safe and growth assets and fitting with the objectives for the money.  Lastly, remaining nimble and flexible to opportunities and rebalancing as appropriate maintains consistency in the approach even as markets experience ebbs and flows. 

1Source: Yahoo Finance