Inflation’s impact on the stock market
Stocks can generally act as a buffer against the long-term impacts of inflation.
U.S. stock and bond markets are heading for severe losses for the 2nd Quarter as investors struggle with decades-high inflation, aggressive Fed policy, and persistent geopolitical risks. In addition to highly negative market sentiment, investors have had to deal with stocks falling into an official stock bear market (defined as a loss of 20% or more from the market’s recent peak.)
It’s not surprising to say many investors find navigating a bear market a challenge. After all, market volatility can be very unsettling and bear markets can leave investors with substantial losses and prone to irrational investment decisions. As investors pour over fundamentals to decipher if we are in an economic slowdown or how long the bear market may last, putting the current quarter into perspective might help investors better navigate these uncertain times.
A curious investor might ask, “How common are stock bear markets? How bad are my losses going to be?” According to Yardeni Research, there have been around 21 bear markets for stocks since 1928, with an average decline of approximately 36%. As the chart above illustrates, the 2nd Quarter of 2022 is on course to be the ninth-worst quarter for the S&P 500 Index since World War II. However, the following 12-month period after these down quarters have seen positive returns for the benchmark stock index by an average of 26%. This illustrates why investors should ignore short-term market noise and maintain a long-term investment horizon.
The market environment is further complicated by the inability of the fixed income market to act as a hedge against equity losses. The Bloomberg U.S. Aggregate Bond Index is down approximately 7% for the quarter, which would make Q2 the third-worst quarter for the benchmark bond index since the 1980s. Moreover, research from Strategas found that “of the 185 quarters since 1976, a negative quarterly return for both stocks and bonds has occurred just 19 times, including the first quarter of 2022. Furthermore, over the same period, there are just four instances where both stocks and bonds are negative for two consecutive quarters with three of those four instances associated with a recession.”
Nevertheless, a prudent investor should remember that a bear market does not guarantee a recession and that market corrections or bear markets have always been temporary. However, the length of recovery can vary. Maintaining an evidence-based, longer-term investment strategy will likely help investors obtain their long-term goals.
This material is not a recommendation to buy or sell a financial product or to adopt an investment strategy. Investors should discuss their specific situation with their financial professional.
Except where otherwise indicated, the views and opinions expressed are those of Nationwide as of the date noted, are subject to change at any time and may not come to pass.
Bloomberg US Aggregate Bond Index: An unmanaged, market value-weighted index of U.S. dollar-denominated, investment-grade, fixed-rate, taxable debt issues, which includes Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities and commercial mortgage-backed securities (agency and non-agency).
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S&P 500® Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries; gives a broad look at the U.S. equities market and those companies’ stock price performance.
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