Bad news on the economy and stock market seem to be mounting, which may be a good sign. Here’s the bad and good news a long-term investor needs to know.
The second quarter ended on Thursday, June 30, 2022, with the Standard & Poor’s losing -16.5% in the three-month period. It was the worst quarter since the onset of the pandemic in the first quarter of 2020, when stocks plunged -19.6%.
The first-half of 2022 was the worst six-month start to any year since 1970, according to Dow Jones Market Data; the S&P 500 price index plunged -21%, according to Standard & Poor’s.
In addition, economic fundamentals were also weaker, according to government data released this past week.
The Institute of Supply Management report on purchasing activity in the manufacturing sector dropped to 53%. An index reading of 50% or more is positive. Though the index is still positive, manufacturing purchasing activity has been in a stair-step plunge for 13 months, and the pipeline of new orders is weak. One of 10 components in the index, New Orders slowed to 49.2%, which was below the 50% demarcation line separating growth from contraction -- not a good sign. “The manufacturing economy is growing but at a slowing rate and perhaps headed for recessionary readings,” says economist Fritz Meyer.
Inflation is cutting into real income. According to data released this past week, real disposable personal income (DPI) per capita was down -3.6% in the 12 months ended May 2022. To be clear, purchasing power shrunk. This chart highlights the after-inflation impact of reduction in DPI per capita in the last 12 months.
The savings rate of Americans has declined sharply, indicating consumers are tapping cash built up in 2020 and 2021, when unemployment benefits increased, and the U.S. Government made transfer payments to keep the economy from contracting sharply during the pandemic at an unprecedented level.
The good news is that a crescendo of bad news in the past marked a bottom. “When the S&P 500 has fallen at least 15% the first six months of the year, as it did in 1932, 1939, 1940, 1962 and 1970, it has risen an average of 24% in the second half,” according to Dow Jones Market Data.
The Standard & Poor’s 500 stock index closed this Friday at 3,825.33. The index gained +1.06% from Thursday and +2.23% from last week. The index is up +52.38% from the March 23, 2020, bear market low and down -22.5% from the January 3rd all-time high.