We are all keenly aware of the news headlines covering the first half of 2022:

“This was the worst first half for the market in 50 years” -CNBC
“The stock market’s ‘horror story’ first half of 2022” -Fortune
“Investors flee stocks and bonds as recession woes haunt markets” -Bloomberg

And the media is loving it. How many more clicks and views would you estimate news outlets receive with these striking headlines? Wise folks know that there is always more going on than the headlines suggest, and nuance does not capture (or keep) attention. Let’s pull back the curtain and take a look at five important points.

#1 – There is (finally) income available from bonds and cash

For years, bonds and cash paid next to nothing. This made planning for short to intermediate-term goals tricky without taking excessive risk. Over the last six months, a wide range of fixed income tools have risen like a phoenix to provide viable options for upcoming purchases. For example, parking money with the federal government for a year via U.S. Treasuries now yields nearly 3% (and interest is exempt from state or local income taxes). The same 12-month Treasury paid less than 0.5% at the start of the year.

#2 – Keep an eye on corporate earnings

Earnings matter. Corporate earnings went on a tear in 2021, with earnings-per-share (EPS) growing by 70%. However, higher costs of doing business (such as energy prices), rising wages, and a strong dollar may be headwinds for earnings. While news outlets want you focused on day-to-day swings in the S&P 500 (or worse, the Dow Jones Industrial Average), savvy folks are watching how the many factors currently affecting our economy – inflation, geopolitical problems, supply bottlenecks, and labor shortages to name a few – impact earnings. For those keeping track at home, analysts are currently projecting an 8% increase in EPS for the full year.

#3 – Stock valuations are below average

The cost to buy those earnings mentioned above in the form of stock ownership has fallen quickly. For example, the price-to-earnings (P/E) ratio (the price of a stock(s) divided by the earnings produced) is a common measure of how expensive or discounted a company or index is at a moment in time (lower = cheaper). That ratio fell from over 22x at its peak to under 16x at the end of June. Granted, the P/E ratio could and may fall further. But the fact of the matter remains that those buying stocks now are paying far less for comparable earnings than earlier this year. That reflects the current pessimism embedded in the market at large.

#4 – Greedy when others are fearful

Famed investor Warren Buffett is widely credited with the quote, “Be fearful when others are greedy and greedy when others are fearful.” Presently, one point is not in doubt: fear is everywhere. The widely followed University of Michigan Sentiment Index preliminary reading for June was the lowest on record – less even than during the financial crisis of 2008-2009 – dating back to the late 1970s. That is, quite simply, an extraordinary amount of pessimism.

With the myriad of bad news and worries we are all living through, it is quite understandable that pessimism is currently carrying the day. Historically, however, pessimistic environments have often been a contraindication: when sentiment is at its worst, stocks frequently performed better going forward. That is not to say this information can be used to time when to buy or sell stocks; there are countless factors affecting stock returns, and market timing can be a disastrous fool’s errand. Sentiment does, nonetheless, provide us with a helpful view of the existing backdrop, and extreme readings demand that we challenge our own feelings on the current state of the markets and the economy.

#5 – Don’t just stand there; rebalance!

You may regularly be hearing the age-old advice ‘stay the course’ as of late. I agree! But one need not simply stand still; action can be taken to seek some benefit from lower stock prices. The disciplined practice of selling investments that have outperformed on a relative basis and purchasing those that are trading at lower valuations is called – in finance speak – rebalancing. Rebalancing is a crucial mechanism for 1) taking advantage of lower prices and 2) maintaining an appropriate target level of risk.

Conclusion

If you have an interest in diving deeper, I’ve attached a Quarterly Market Review that provides a nice summary of where many different investment types (i.e., ‘asset classes’) have been this quarter and year. More importantly, the review serves as a helpful reminder of the positive returns in stocks over the last 3, 5, and 10 years. During stressful markets, we are all better off by putting current events in context.

Beyond the Headlines: Market Review – 2nd Quarter 2022