It’s been a difficult first half to the year, with equities, bonds, precious metals and cryptocurrencies all suffering losses. Markets are grappling with issues like the COVID reopening, inflation, central bank rate increases, the Russia-Ukraine War, and recession risk.
The charts below provide reason for optimism. As you’ll see, this is indeed an extraordinary decline for markets. Extraordinary declines reset asset prices from “historically expensive” to “historically fair”, which is healthier in the long run. Extraordinary declines are usually followed by stronger returns in the ensuing five years.
Here are 8 charts that present an optimistic viewpoint moving forward:
Consumer Sentiment: consumer sentiment, currently, is lower than during the Great Recession in 2008. The average 12-month return from these sentiment troughs is +24.9%.
Nasdaq Performance: since 1985, this is the worst start to the year on the Nasdaq.
Consumer Savings: over $2 Trillion of excess personal savings from COVID remains unspent.
S&P 500 Forward P/E Ratio: the current market correction has lowered the P/E ratio to 15.94x earnings, which is lower than the 25-year average of 16.85x earnings. Valuations are fair but are not considered “cheap”.
Staying with the S&P 500, here we see the 1- and 5-year return outcomes following various P/E valuations. 1-year returns are a mixed bag but over 5 years, results are overwhelmingly positive.
Fixed Income / Bonds: bonds have gone through one of the worst periods in history…
… but yields are now towards the top end of their 10-year range in most sectors. Starting yield is a strong predictor of 5-year bond returns.
The Worst S&P 500 Quarterly Returns: here, we see the S&P 500’s return history in various time periods following the worst quarters since 1926. The average return increases dramatically as time passes from these poor quarterly results. “Over decade long time horizons, your investment performance will mainly be derived from how you handle corrections, bear markets and market crashes.”
We will leave you with a helpful paragraph from a TD Wealth Insights Report:
There’s no denying the current challenges, which are reflective of a late phase in the economic cycle. It’s going to remain challenging as economic growth slows and we move through this regime shift of rising rates. It’s important to always remember that the equity market is a discounting mechanism; current prices reflect expectations in the future, and expectations are for slowing growth. Market volatility creates opportunities, but this is also a time to be selective and diligent. With that in mind, we remain focused on defensive positioning, value and quality companies that generate strong free cash flow and can grow earnings and dividends. In this environment, fundamentals and proper risk-factor diversification are especially important. While the current risk-off environment feels terrible, they have also brought the price of companies with strong attributes down to very attractive levels. Remember, as an equity investor, you are an owner of businesses that will continue to sell their products, generate cash flow and pay dividends. We will continue to take a patient approach, focusing on compelling value ideas that offer attractive opportunities.
Thank you for your continued support, and please contact us if we can be of any assistance.
Sources: Fidelity, TD Asset Management