For global investors, 2022 has been a game of two contrasting halves. In the first week of this year, the US S&P 500 index hit an all-time high of 4,818.62 points on 4 January. It then declined, diving steeply after Russia invaded Ukraine on 24 February. At its 2022 bottom, the index hit a low of 3,636.87 on 17 June. At that point, the widely followed index had lost almost a quarter (-24.5%) of its value. This left US stocks in a bear market, defined as a fall of 20%+ from a previous high.
Bouncing back from a bear market
For the record, H1/2022 saw US stocks record their worst first-half result in 52 years (since 1970). However, stocks have rebounded strongly since the lows of mid-July. As I write, the S&P 500 stands at 4,275.26, having leapt by more than a sixth (+17.6%) from its 2022 low. This led many financial pundits to declare that 2022’s bear market is over and done with. But I’m far from sure. Here’s why.
Inflation still worries me
The first thing to worry me is that inflation — rising consumer prices — is running rampant in the US and UK. The US Consumer Price Index (CPI) slipped to 8.5% in the year to July, down from 9.1% in the year to June. This small drop caused a chorus of experts to argue that ‘peak US inflation’ is already behind us.
I’m unconvinced, because inflation kept rearing its ugly head through the 1970s. I remember my boyhood decade as being really tough, particularly for low-income families like mine. It also taught me that inflation is much ‘stickier’ than many economists believe. Indeed, cigar-smoking Federal Reserve chairman Paul Volcker hiked the Federal Funds Rate to 21.5% in 1981 before finally getting inflation under control.
I also fret about rising rates
My second-biggest worry is rising interest rates on both sides of the Atlantic. Currently, the Fed rate stands at 2.25% to 2.5% a year. However, markets expect this to rise by another 1.25 to 1.5 percentage points by end-2022. Markets predict similar rate rises here in the UK. But history has taught me that rising rates often trigger recessions and bear markets, as happened repeatedly in the 1970s and 1980s.
I’m worried about global growth, too
UK consumers face a big squeeze on their disposable incomes, especially from skyrocketing energy bills. Also, rising rates will most likely slow house-price growth — and could even send it negative. Meanwhile, commodity prices are falling as economic growth slows, while business and consumer confidence is down in the dumps. And while Fed chair Jerome Powell talks about navigating a soft landing, I fear a hard landing — or even a crash landing in the form of a deep and prolonged recession.
I’ll buy the next bear market
Famed investor Baron Rothschild once remarked, “Buy when there’s blood in the streets, even if the blood is your own”. Likewise, legendary value investor Warren Buffett said, “Be greedy when others are fearful”. Taking these wise words to heart, my wife and I have been aggressively buying shares since late June. Though I’m gloomy now, I won’t let my glum mood damage my future wealth. Hence, I’ll buy more shares in quality US and UK companies if/when the bear market returns!