2022 has been historically difficult for investors so far. From massive inflation to soaring yields, to a slowing economy, to a bear market for stocks, to one of the worst years ever for bonds, there are many worries for investors. Eric Wishan, M.A., Managing Director, Partner & Wealth Advisor at Carson Wealth has provided the following insights. Here are 10 things to know about the current financial market.

1 — JUST HOW BAD HAS THIS YEAR BEEN?

There is no way to sugarcoat things, 2022 has been very rough for investors. Bonds historically have done well when stocks don’t do well, but this year that isn’t happening. In fact, the five previous times the S&P 500 lost 10% or more for the year, bonds (as measured by the Bloomberg U.S. Aggregate Bond fund) gained every time, up 7.7% on average.

With the S&P 500 price index down 22.5% for the year and bonds down 13.8%, only 2008 was a worse year for a 60/40 portfolio. A 60/40 portfolio has 60% in stocks and 40% in bonds.

2 — MY BONDS ARE DOWN A LOT, HOW BAD HAS IT BEEN?

Yields have soared this year on higher inflation expectations and a hawkish Federal Reserve, as a result, bonds have been historically bad. Remember, yields and bond prices historically trade inversely. The Bloomberg U.S. Aggregate Bond Fund is currently down nearly 14% for the year, far and away the worst year ever (since 1976 when the Agg began trading). To put things in perspective, it had never been down two years in a row (which will likely happen this year) and the previous worse year ever was a 2.9% drop in 1994.

3 — WHY SHOULDN’T I JUST SELL EVERYTHING RIGHT NOW?

Markets don’t care about what just happened (although investors do), they are more focused on what is next. The truth is that stocks historically haven’t done very well the first few quarters of a midterm year, but they do quite well once the midterm election is over.

In fact, since World War II, the S&P 500 has been higher a year after the midterm election every single time, up 14.1% on average. If an investor is worried about things right now, they need to know much better times could be coming and soon.

Building on this, if you look at the entire 4-year Presidential cycle, the upcoming quarters are some of the very best out of 16 total quarters.

One final reason for investors to remain optimistic and not sell now is that stocks do very well off of a midterm year low. In fact, the S&P 500 has gained more than 32% on average off the lows and has never been lower a year later since 1950. The June lows are not far away from current levels and should new lows be made, this could be another positive for investors going out a year or more.

4 — SHOULD WE HAVE SEEN THIS TROUBLE COMING?

Although the size of the drop in stocks and bonds is surprising, to see some weakness this year wasn’t overly surprising. As the chart above showed, some of the worst quarters of the four-year cycle took place during this year. Adding to that, below we show that the second year (so this year) under a new President tends to be quite weak as well. The good news is look at how well stocks do the following year under a new President.

5 — WHAT SHOULD WE DO NOW THAT STOCKS ARE IN A BEAR MARKET?

There’s an old saying that the stock market is the only place where when things go on sale, everyone runs out of the store screaming. Things are no doubt on sale and investors with a long enough investment horizon should be looking at this weakness as an opportunity.

We continue to think the economy isn’t in a recession (more on this below), so that likely means stocks won’t fall significantly from here. Looking at all the bear markets that took place without a recession showed stocks falling about 24% on average. In fact, only once did stocks fall more than 30% without a recession and that was the 1987 crash. Investors need to know more near-term pain is always possible, but a major low could be quite near.

6 — WHAT COULD HAPPEN ONCE THE BEAR MARKET IS OVER?

No one knows when this current bear will end (we do think it will be fairly soon), but investors should be open to significant gains coming off of the bear lows.

7 — IS THE FED GOING TO BREAK SOMETHING? OR WHEN WILL THEY STOP HIKING?

The Fed has made it very clear that they would be ok with some pain (think a mild recession) to put a lid on inflation. There is no easy answer here, but Chairman Powell knows the history and knows that the Fed didn’t increase rates enough or keep them high for long enough in the 1970s, which led to massive inflation in the late ‘70s and early ‘80s. The truth is the Fed might break something and that might be part of their plan.

Looking back at the previous eight rate hike cycles shows that the Fed hikes until rates get above the headline CPI number. With inflation still running at 8.3% and rates at 3.25%, more hikes could be in the cards. And the Fed’s latest projection suggests we’ll see at least another 125-150 basis points of rate hikes.

8 — WILL INFLATION EVER COME BACK DOWN?

The recent CPI number was disappointing, showing prices for many goods and services at the consumer level were increasing more than expected. The good news is various other inflation measures are coming back quickly in many cases. For starters, energy prices have fallen and in many cases are lower than before the war started, a good sign.

Additionally, prices paid components in various surveys have pulled back quickly. Given this tends to lead CPI by a few months, it is a good sign. Meanwhile, supply chains are improving, as this survey by the NY Fed shows.

Lastly, one of the main reasons we are optimistic inflation could be about to come down quickly is that used car prices are rapidly dropping. The recent Manheim Used Car Value Index fell 4% last month, one of the largest drops ever. Used cars make up a large part of inflation readings and this should provide a nice tailwind going forward.

9 — AREN’T WE IN A RECESSION RIGHT NOW?

The odds of a recession in 2023 have unquestionably gone up, as the Fed continues to hike rates. But currently, we do not see the economy in a recession. The main reason is the employment backdrop is so strong. More than 3.5 million jobs have been created this year, one of the most ever and not at all recessionary. Additionally, industrial production has been very strong, another important component to the economy. Even consumer spending has remained stubbornly strong amid all the concerns.

Now there are obvious worries, as consumer confidence has been very low (but has been improving with gas prices falling), while manufacturing has slowed, and housing data is tanking due to higher mortgage rates. Currently, we think this is more of a mid-cycle slowdown versus the start of a recession. A similar period to now is the last time the Fed was this aggressive back in 1994. Back then we saw a midcycle slowdown before the economy began to grow in the mid to late ‘90s.

10 — I’M WORRIED ABOUT WHAT COULD HAPPEN AFTER THE MIDTERM ELECTIONS.

One thing we try to stress on the Carson Investment Research team is not to mix your politics with investing. Many investors didn’t like President Obama and missed out on significant gains, while many didn’t like President Trump and missed out on gains.

Turning to the midterms, we know the party that lost the prior Presidential election is the motivated party and they tend to gain 4 seats in the Senate and nearly 30 seats in the House. Should this pattern hold again, and the Republicans take both chambers of Congress, this is the very best scenario for stocks. As we show below, a Democratic President and Republican-controlled Congress has seen the S&P 500 gain more than 16% on average during the calendar year. In fact, we saw this in the late 1990s under President Clinton. What if the Democrats keep control of the Senate? This is about a coin flip by the oddsmakers and the good news is a Democratic President with a split Congress is also a bullish scenario.