The first half of 2022 was ugly, but at least there are signs that the worst is behind us.
Only six times has the S&P 500 lost more than 15% in the first half of the year since 1932. The result should not be a surprise, given the headwinds facing the economy:
- Inflation above 8% per year (highest since 1982).
- Aggressive tightening by the Fed (1.5% rate increase thus far with more pending)
- Slowing growth expectations
- Rising risk of recession
- Persistent conflict in Ukraine
The S&P 500 officially entered a bear market on June 13, with a 20% decline from the peak. Keep in mind that the market appeared overvalued at the beginning of the year, and now looks to be about 17% undervalued. From these levels, with forward PE ratios between 16 -17x, the greatest risk to the market would be an extended recession with persistently lower earnings. Earnings moderation is priced-in, earnings collapse is not.
I believe this is a good time to add to equity investments. Short term result can vary wildly, but as the time horizon extends to 5 years or more, the chances of attractive returns increase dramatically, particularly from current valuation levels.