The economy is on the brink of a recession, hit by high inflation and rising interest rates, which are eating away at wages, hurting consumer confidence and leading to business cuts. As it has fallen, the markets have fallen. The stock market is well on its way to the worst first six months of the year since at least 1970. The S&P 500, the cornerstone of many stock portfolios and retirement accounts, peaked in early January and fell 19.9 percent over the past six years. months. The sell-off was remarkably wide, with all sectors except energy falling this year. Bellwethers, such as Apple, Disney, JPMorgan Chase and Target, have all fallen more than the overall market. And this is just one part of the horror story for investors and companies this year. Bonds, which are considered to provide lower but more stable returns for investors, also had a terrible semester. Because bonds are particularly sensitive to economic conditions, reflecting changes in inflation and interest rates more directly than equities, this is perhaps an even more worrying sign of the state of the economy. An index that tracks the 10-year Treasury bill, a benchmark for borrowing costs for mortgages, business loans and many other types of debt, has fallen by about 10 percent in price. Deutsche Bank analysts had to return by the end of the 18th century to find worse first-half yields on equivalent bonds. “Make no mistake, this was a sad first half,” said Jim Reid, Deutsche Bank’s head of credit strategy and subject research. For the average investor with a diversified portfolio of stocks and bonds, he probably feels that “nothing worked,” according to Victoria Greene, chief investment officer at G Squared Private Wealth. This is especially true for investors who bought at the beginning of the year, when markets were more bullish. “The respectable 60-40 portfolio has not held up at all,” Green said, referring to the mix of 60 percent stocks and 40 percent bonds traditionally offered by financial advisers to investors to protect them from a fall. Since the beginning of the year, stubbornly high inflation, which is now running at its fastest pace in more than 40 years and has been exacerbated by rising food and energy prices due to the war in Ukraine, has eroded corporate profit margins. This came on top of the supply chain’s persistent grunts that also made it difficult for companies to meet customer orders and manage inventories. As investors reassessed the outlook for the companies and sold their shares, the S&P 500 fell into a bear market a few weeks ago, a rare and grim sign of pessimism that Wall Street has set as a 20 percent drop from a recent peak. The index has fallen in 10 of the last 12 weeks, with occasional rallies weakening rapidly as a new period of anxiety floods the market. The Federal Reserve’s determination to tame inflation by raising interest rates is a major factor in the market turmoil. Higher borrowing costs cool the economy by reducing demand, which in turn reduces price pressures. The sharply higher bond yields, which are moving in the opposite direction in terms of prices, have led to losses in bond investors’ portfolios. UPDATED June 30, 2022, 9:51 a.m. ET And if the Fed’s fight against inflation demands that interest rates go up so high, so fast that the economy plunges into recession, that would limit companies’ ability to hire new staff, spend on new projects and pay off their debts. , which is ominous for both stocks and bonds. Assets not believed to be affected by these trends have also offered little shelter. Bitcoin, the largest cryptocurrency, has fallen more than 50 percent this year. Looking at the financial wreckage, the question arises: How much harm could be done? In the coming weeks, companies will start reporting their earnings for the second quarter, informing investors about the progress of their finances. These reports will be examined for indications that the shaky economy may take a turn for the worse, which will influence buying and selling decisions. Equally important to what companies are revealing about their last quarter is what they are saying about how things are going for the next quarters, according to Steve Sosnick, chief strategist at Interactive Brokers. “In general, expectations remain very high,” he said. This is either a sign that the situation may not be as bad as some people fear, or that they are going to be disappointed. Analysts’ earnings forecasts for companies such as Apple and JPMorgan Chase remained relatively stable last month. Andy Sieg, president of Merrill Lynch Wealth Management, said he had not seen a significant increase in customer activity that could be expected during a period of turmoil. There has been, however, a sharp rise in customers seeking financial planning talks over the past year, which he described as a “constructive” approach to tackling the recession. “When markets are more volatile, emotions increase,” Sieg said. “This is just a normal human reaction to the kind of environment we live in.” Even if the news about corporate profits or the economy is not as bad as some fear, it may take time for the gloomy mood to change and what many believe to be another false dawn that will signal a decisive turning point. “Usually, a bear market changes when people still feel horrible,” said Greene of G Squared Private Wealth. “There is only one real bottom,” said Sosnick of Interactive Brokers. “This is really the last turning point. And so it is not clear to me that we have yet to see the conditions that mark one of them. “ For Deutsche Bank’s Reid, “a lot depends on the timing of the recession,” he said. The fall of the shares so far would be extremely extreme if it was not accompanied by a recession, according to his research. Economists are increasingly predicting that the US economy will be in recession and a shrinking economy is more in line with the scale of the market decline that Mr Reid expects. He believes it is “reasonable” for the stock market to fall 35 to 40 percent from its peak in January, which means that the current fall is only halfway.
