Some of the best investment opportunities happen when stocks go through periods of weakness. Most recently we saw that with COVID. In the short run stocks fell sharply in early 2020 because of COVID, but in the long run that turned out to be a good time to buy. This is a good way to look at 2022 because it has been a tough year for stocks.
- The tech-heavy NASDAQ (QQQ) is down 28%.
- The S&P 500 (SPY) is down 19%.
- The Vanguard Global Stock Index (VT) is down 17%.
Take a look at the 2022 chart below.
*chart from tradingview.com
Weakness in stocks has been driven by three major headwinds.
- Inflation at a 40-year high is hurting consumer spending.
- Rising interest rates are weighing on economic growth.
- War in Ukraine disrupting the global supply chain.
There’s no question it’s been a tough year and I know that investors aren’t having a lot of fun looking at their account statements. Looking forward, here is the key question: is there any hope? Here’s how I expect things to play out in the next 3-6 months.
In the short run I’m expecting to see more volatility this summer. I expect inflation to rage on this summer with higher oil and gas prices and I expect that to hurt consumer spending. However, after some more volatility in the next few months, I expect stocks to settle down a lot and stabilize – for three reasons.
Rising interest rates will curb inflation: Interest rates are up big in the last six months. The most important interest rate, the 10-year government note, has been surging, more than doubling. This is painful medicine for inflation, because it slows economic growth, consumer spending and the stock market. But in the long run, higher rates are extremely effective at curbing inflation and I expect to see that happening by the end of summer. Getting inflation under control will set the stage for an economic and stock rebound. Anyone looking for context on how sharply and quickly interest rates have risen, take a look at mortgage rates – in the span of six months they jumped from a 5-year low to a 5-year high.
Take a look at the 5-year chart below.
*charts from Freddie Mac
After the recent spike, mortgage rates are at a 13-year high. Take a look at the 10-year chart below.
Bear markets usually last 9.5 months: A bear market happens when stocks fall 20% from the 52-week high. Since 1982 they have happened once every four years and eight months. According to research from Bank of America, the last 19 bear markets have lasted an average of 289 days. The S&P 500 hit bear market territory in Friday. If this sell off plays out like an average bear market, then its about half over and we should see stocks rebounding 20% from the low in late summer or early fall.
A bullish 7-month cycle: The seven months from October to April are historically very good for stocks. This year, that would line up with the potential expiration of this bear market. Take a look at the table of returns below.
Things are rough right now and I know investors and consumers are feeling the pain. Inflation is terrible, the economy didn’t grow last quarter, stocks are down.
However, remember, this pain is the product of rising interest rates. And interest rates simply have to rise because inflation is out of control. This medicine is bitter in the short run, but the short term pain is setting the stage for long-term gains.
I’ll be back with another update next week, everyone have a nice day.
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading. Author Michael Vodicka owns shares of the S&P 500 (IVV), Vanguard Global (VT), NASDAQ 100 (QQQ).
