Will inflation moderate? Is all the bad news priced in? What will the second half of 2022 bring? SPDR Chief Investment Strategist Michael Arone shares his take on five questions that may offer investors insight.
Mercifully, a brutal first half of 2022 has come to a close. For investors, there weren’t many places to hide from negative returns, as both stocks and bonds had one of their worst first-half performances in history.1 As a result, nearly all manner of diversified portfolios — conservative, moderate, and aggressive — suffered losses for the first six months of the year.
S&P Calendar Year Normalized Performance
Rather than licking our collective wounds and bemoaning our bad luck, let’s cautiously look forward to the second half of 2022 — when a durable rebound in risk assets hinges on the answers to these five burning questions:
- Will inflation moderate?
- What is the Federal Reserve’s (Fed) terminal rate?
- Will the economy experience a softish landing or recession?
- How much will earnings estimates have to be cut?
- Is all the bad news already priced into risk assets?
Here’s my take on the five burning questions investors should ask now, as the second half of 2022 gets underway.
Will Inflation Moderate?
The simple and incomplete answer is, yes, inflation will moderate in the second half of the year. The more important and elusive answer is at what level inflation will settle. Regardless of which measure you prefer, inflation is likely to remain far higher than the Fed’s average 2% inflation target.
1Bloomberg Finance, L.P., as of June 30, 2022.
2Reuters as of June 29, 2022. https://www.reuters.com/markets/us/record-trade-deficit-weighs-us-economy-first-quarter-2022-06-29/.
Consumer Price Index (CPI)
A widely used measure of inflation at the consumer level that helps evaluate changes in cost of living. The CPI is composed of a basket of consumer goods and services across the economy and is calculated by the US Department of Labor by assessing price changes in the basket of goods and services and averaging them. Core CPI is the same series, but excluding food and energy prices, which are considered to be volatile enough to distort the meaning and usefulness of so-called headline CPI. The absence of food and energy, means the core series reflects long-term inflation trends more accurately.
Core Personal Consumption Expenditures Index (PCE)
Measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. The PCE is the Federal Reserve’s favored inflation gauge.
An overall increase in the price of an economy’s goods and services during a given period, translating to a loss in purchasing power per unit of currency. Inflation generally occurs when growth of the money supply outpaces growth of the economy. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.
A contraction in economic activity as profits decline and consumer expectations begin to bottom out that typically leads to accommodative monetary policy. Recessions have been characterized as at least two consecutive quarters of economic contraction, but definitions vary and the concept is subjective.
Originally Posted July 6, 2022 – 5 Burning Questions Give Investors Insight: Durable Rebound or More Pain to Come?
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