After US stock market’s worst start in 50 years, some see more pain ahead

NEW YORK (NYTIMES) – Wall Street set records in the first half of the year, none of them good.

The US economy is on the cusp of a recession, battered by high inflation and rising interest rates, which eat into pay cheques, dent consumer confidence and lead to corporate cutbacks. As it has teetered, markets have tanked.

The six months through Thursday (June 30) were the stock market’s worst first half of a year since 1970. The S&P 500, the cornerstone of many stock portfolios and retirement accounts, peaked in early January and has dropped nearly 21 per cent over the past six months.

The sell-off has been remarkably broad, with every sector except energy down this year. Bellwethers including Apple, Disney, JPMorgan Chase and Target have all fallen more than the overall market.

And that is only part of the horror story for investors and companies this year.

Bonds, which are seen as providing lower but more stable returns for investors, have had a terrible six months, too. Because bonds are particularly sensitive to economic conditions, reflecting shifts in inflation and interest rates more directly than stocks, this is perhaps an even more worrying sign about the state of the economy.

An index tracking the 10-year Treasury note, a bench mark for borrowing costs on mortgages, business loans and many other kinds of debt, has fallen about 10 per cent in price. Analysts at Deutsche Bank had to go all the way back to the late 18th century to find a worse first-half-year performance for equivalent bonds.

“Make no mistake, this has been a torrid first half,” said Jim Reid, the head of credit strategy and thematic research at Deutsche Bank.

For the average investor with a diversified portfolio of stocks and bonds, it probably feels like “nothing worked,” according to Victoria Greene, chief investment officer at G Squared Private Wealth. That is especially true for investors who bought at the start of the year, when markets were in a more buoyant mood. “The venerable 60-40 portfolio hasn’t held up at all,” Ms Greene said, referring to the mix of 60 per cent stocks and 40 per cent bonds that financial advisers traditionally suggest to investors to protect them from a downdraft.

Since the start of the year, stubbornly high inflation, which is now running at the fastest pace in more than 40 years and made worse by soaring food and energy prices because of the war in Ukraine, has eroded corporate profit margins. That has come on top of the persistent supply chain snarls that have also made it harder for companies to fill customer orders and manage inventories.

Rising prices have also hit consumer spending, the bedrock of the US economy. A government report on Thursday showed that spending in May increased at its weakest pace of the year, and spending on goods, where prices have been rising the fastest, fell. Another recent report showed that consumer spending earlier in the year rose more slowly than previously estimated. And a variety of gauges that track consumers’ predictions about how fast prices will rise in the future have also been ticking up, a worrying sign that inflation might become more entrenched in the economy.

As investors have been reassessing the outlook, a few weeks ago the S&P 500 fell into a bear market, a rare and grim sign of pessimism, which Wall Street defines as a 20 per cent fall from a recent peak. The index has declined in 10 of the past 12 weeks, with occasional rallies quickly fizzling as a new bout of worries washes over the market. This has scared away companies from going public, with initial public offerings in the first half running at the slowest pace since 2009, in the aftermath of the financial crisis.

The Federal Reserve’s determination to tame inflation by raising interest rates is a major factor in the market turmoil. Fed Chair Jerome Powell said Wednesday that the central bank’s efforts to fight inflation were “highly likely to involve some pain.”