From stocks to crypto, a penalty of six months for investors

Americans with stock portfolios or retirement investment plans would probably prefer to forget the last six months.

The S&P 500, Wall Street’s broad benchmark for many equity funds, closed the first half of 2022 with a loss of more than 20% after starting the year at a record high. It is the worst start to a year since 1970, when Apple and Microsoft had not yet been founded.

Investors have struggled with uncertainty and fear this year after a sharp rise in interest rates as the Federal Reserve and other central banks struggled to tame the highest inflation for more than 40 years. Higher interest rates can bring inflation down, but they also slow down the economy, increasing the risk of a recession. It has helped pull down the value of stocks, bonds, cryptocurrencies and other investments.

On June 13, the S&P 500 crashed into a bear market, falling more than 20% below the record high it set at the beginning of this year. It is now 21.1% below the record high of January 3, back to where it was at the beginning of March last year.

The Fed has been at the center of the market slowdown and raised its short-term interest rates three times this year. Its most recent increase earlier this month was three times the usual amount and its largest increase since 1994. Larger increases are almost certain.

“You could argue that they’re just playing the hand they got, but the reality is that they were caught a little bit behind the basket and their focal point towards a much more aggressive political stance has been the reason the market has sold off. . ” said Ross Mayfield, investment strategist at Baird.

ONE WINNER, MANY LOSERS

Technology companies, retailers and other stocks that were big winners during the pandemic have been among the biggest losers this year. That includes a drop of more than 36% for Tesla, a dive of 71% for Netflix and a dive of more than 50% for Facebook parent Meta.

Rising bond yields have made these stocks look too expensive relative to less risky corners of the market, such as utilities, household items and healthcare companies. These are often called “value” stocks to distinguish them from stocks in high-growth companies.

Energy is the only winner this year among the 11 sectors in the S&P 500. The sector has so far grown by more than 29%, supported by rising oil and petrol prices.

Of the 21 stocks in the index that have risen more than 20% this year, all but seven are energy companies.

PUMP PAIN, ENERGY LOSS

The sky-high prices at the pump are the result of a classic squeeze.

Demand for gasoline and other oil products rose after the economy roared out of the cave created by the coronavirus. At the same time, supplies of crude oil and petrol remain tight. The invasion of Ukraine disrupted a major energy-producing region of the world, with sanctions blocking oil from Russia, which became number three in the world for oil production at the end of last year.

Meanwhile, refineries have less ability to convert oil into gasoline in the United States after several shutdowns during the pandemic. U.S. refining capacity has been declining for two years in a row, according to the U.S. Energy Information Administration.

As a result, gasoline prices have shot to records this year, with the national average for a gallon regular topping $ 5 per gallon earlier this month, according to AAA.

It has meant misery for many motorists, but a good gain for investors investing in energy stocks.

For such a strength to continue, however, concerns about a recession must subside. Recessions have historically led to a fall in oil prices by destroying demand. And over the past week, shares of energy companies have fallen even more than oil prices as some investors became more afraid of just such a scenario, according to strategists at Barclays.

BROKEN BONDS

Sometimes even the quiet in the group loses calm.

Bonds are supposed to be the more stable, more reliable part of a portfolio. But they not only slammed investors with losses in the first half of this year, they are heading for one of their worst performances in history.

High-quality bonds of investment grade fell by 11.3% in the first six months of 2022 from Monday. Any downturn is a remarkable thing for bonds. The Bloomberg US Aggregate Index, which many bond funds use as their benchmark, has had only four lost years on records all the way back to 1976.

This year’s losses are solely the result of high inflation and the Fed’s reaction to it. Inflation is generally sinister for investors because it erodes the buying value of the fixed payments that bonds will make in the future.

The interest rate on the 10-year treasury has already more than doubled this year. It was 2.97% on Thursday. More pressure may be on the way as the Fed continues to raise interest rates, although some analysts say the worst damage may be over.

Strategists at the Wells Fargo Investment Institute recently raised their forecast for where the 10-year Treasury Department will end this year to a range of 3.25% to 3.75%. But they also see it moderating next year to a range of 2.75% to 3.25%.

CRYPTO-KRASH

Supporters of cryptocurrencies have hailed them as, among other things, good hedging against inflation and a safe haven when the stock market falls. They have not been any of these things this year.

Bitcoin fell from nearly $ 69,000 in November to below $ 20,000 this month, in part because of the same forces that hit equities: inflation and higher interest rates.

Some events unique to the cryptocurrency industry also took into account and eroded investor confidence. A so-called stablecoin collapsed, costing investors about $ 40 billion. A hedge fund dedicated to digital assets was reportedly facing liquidation. And some bank-like companies, which take cryptocurrencies as deposits and then lend them out, suspended withdrawals while trying to bolster their finances.

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