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Here Comes The Sun

Here Comes The Sun

May 05, 2022

May 5, 2022

Dear Clients & Friends,

As we move into spring and leave behind the last signs of a long winter, many worries remain from a chilly start to the year for the markets.  The S&P 500 Index had its worst April in more than 40 years-- declining 8.5% for the month-- which now means the nation’s best-known gauge for stock market performance is down just 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, major geopolitical concerns, an aggressive Federal Reserve Board (Fed) rate hiking campaign, and soaring yields have all contributed to the wall of worries.  Not to mention economic growth concerns 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 should 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. Expert consensus is that GDP growth will be approximately 3% this year, which means we will likely 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 pricing currently.

From its early January peak, the S&P 500 has corrected 13.9% (as of April 29), right in line with the average annual correction since 1980 of 14.0%.  As uncomfortable as this year has been, this action is 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.  Let's not give up hope.

The investing climate is quite challenging, but based on historical trends, investor patience will be rewarded in the long run. 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, which means this may be an attractive entry point if you have money to invest.  Here comes the sun and the future always looks bright!

Thank you for your continued trust and confidence.  Please contact me directly if you have any questions.


Important Information

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All data is provided as of May 3, 2022.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All index data from FactSet.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.