It's extremely difficult to watch the news and not feel overwhelmed by the avalanche of negative headlines. Some of them, such as the war in Ukraine, are heartbreakingly negative, outright terrifying, and tragic. Others – inflation, Fed hikes and extreme volatility—are clearly linked, but, at the same time, add to the sense of gloom that pervades the current U.S. equity markets.
Despite this glut of negativity, there are reasons to be constructive on market performance for the remainder of 2022. We’re at peak pain in the market and in an extreme risk-off investing environment. The news is never great at the bottom of a sell-off, so what is the path forward?
Let’s start with the on-going war in Ukraine. Clearly what is happening there is a human tragedy on a level that is hard to find adequate words for. Further, it’s clear that it has had a negative effect on the market for a litany of reasons. Setting aside the incredible human cost, what effects are likely to impact the market for the remainder of 2022?
While the war is disrupting energy and food supplies and casting a scary pall over the market, it is not the first nor the last “bad news” event that in the moment feels like a headwind that can never be overcome.
If what’s past is prologue, then referencing previous market-shaking events could be instructive. For example, looking back to March of 2020 at the onset of the Pandemic, was the market convinced at that time that the market would be materially higher over the next 18 months? No. Circumstances change and markets evolve. Similarly, it seems reasonable that the current war alone should not be enough to keep the market negative.
What about inflation and the corresponding rate hikes? The CPI release on May 11, 2022, was just the most recent data point reflecting high inflation and the necessity for rate hikes (with the first 25 basis points of tightening occurring on March 16, 2022, and an additional 50 basis points on May 4, 2022).