As we all likely know by now, the first half performance of the market in 2022 was the worst since 1970. Rising Oil/Gas prices, Commodity Inflation, rising interest rates, war in Ukraine, along with many other factors have contributed to the overall weakness. In the 35 + years I have been doing this, I can’t remember a 6 month period that was so void of positive media news. The steady drum beat of negative news has been sobering. So what we have seen is the market adjusting P/E’s downward with expectation of a forth coming economic slowdown. Year to date the S&P 500 has fallen 21% and the Nasdaq has fallen over 30%. Additionally, per SentimenTrader.com, “Over the past 5 weeks, the S&P 500 has swung by 5% more than 4 times. That makes this the 2nd-most volatile period since 1928.”
Goldman Sach’s put out a research piece on Tuesday that sets their 2023 earnings forecast for the S&P 500 at $239 per share. This places a 15X P/E multiple on the S&P 500. By historical standards a 15X P/E ratio is relatively normal. Not overvalued and not undervalued. So if Goldman Sachs is right, and Corporations can meet earnings expectations in the coming quarters, it is possible the worst of the market decline is past. However, should S&P 500 Corporate earnings not meet these expectations, we are likely due for some additional downside before a market bottom is in.
In the meantime, The Atlanta Fed has an interesting GDP Now model estimating real GDP growth. On July 1 they came out with the 2nd quarter seasonally adjusted annual rate of GDP growth rate as -2.1%. After July 1 Manufacturing ISM Report On Business from the Institute for Supply Management and the construction report from the US Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.7 percent and -13.2 percent, respectively, to 0.8 percent and -15.2 percent, respectively. So it is fair to now say, we are in recession. The next GDPNow update is Thursday, July 7.
Given this recent GDP news, it will be interesting to see how Fed Policy adjusts at the next Fed meeting. It appears that the Fed medicine in the form of rising interest rates is having the desired effect of slowing things down economically. However, if they aren’t careful, the medicine to fight inflation could create worse side effects than desired. They have a very delicate balancing act to navigate. One thing I can say from experience is that this first half period of weakness will pass and a bottom will be established at some point followed by a recovery and rally.
As always, we thank you for your continued confidence and please don’t hesitate to call should you have any questions. We are here to help with anything financial.