Understand why US stocks closed in the worst first half in 52 years

The S&P 500 recorded its worst first half in over 50 years, falling 20.6% during the first 6 months of 2022.

Shares closed lower on Thursday (30), as Wall Street said goodbye to a dismal second quarter and first half of the year.

All three major indices ended the month and quarter in the red.

The S&P 500 had its worst half since 1970, the Dow Jones had its biggest first-half decline since 1962, and the Nasdaq had its biggest percentage decline ever. This is the second consecutive quarter of declines for all three indices.

Markets this year have been shaken by a series of hostile headwinds: Russia’s war on Ukraine, Covid-19 lockdowns in China, soaring inflation and aggressive rate hikes by the Federal Reserve. All these factors have fueled investor fears of a recession, causing a rush to exits.

The S&P 500 has lost $8.2 trillion since the start of the year and suffered its worst June since 2008 and the worst quarter since 1970, with all 11 sectors in the red, according to Howard Silverblatt, senior index analyst at the S&P Dow. Jones Indices.

In short, things are looking dire. But that doesn’t mean they’ll stay like this.

Correlation and causality

The good news is that after a bad performance, the market always goes back up… eventually.

There is also very little correlation between the S&P 500’s first and second half performance, at least historically. The S&P 500 lost 21% in the first six months of 1970 but rebounded to gain 27% in the second half, according to data from the S&P Dow Jones Indices.

The bad news is that when markets drop so significantly, the next quarter isn’t always great. During the last three worst starts to the year, with declines of 5% or more, the S&P 500 fell in the third quarter by 6.8%, 2.2% and 2.1%, respectively, said Sam Stovall, chief financial strategist. investments from CFRA Research.

market bear

But timing is important, added Stovall. It took 161 calendar days for the market to drop from its peak on January 3rd to the current bear market. This is much faster than the typical average period of 245 days.

And a fast bear is usually not as big and scary as a slow, heavy one. In the past, markets that took less than 245 days to go from peak to trough, as measured by a 20% fall threshold, had losses of less than 27%. Those that take longer to fall have losses of 33%.

US equities typically do well after entering bear markets, at least in the long term.

Stocks are up on average nearly 15% a year after hitting bear territory, with an even better average gain of 23.8%, according to data from Ryan Detrick, chief market strategist at LPL Financial.

It’s not uncommon for stocks to make quick recoveries from bear market lows, Detrick said.

The average bear market takes about 19 months to recoup all of its losses, but when the S&P 500 drops by less than 25%, recoveries take an average of just seven months. Recently, the recovery has been even faster: the last three bear markets took just four to five months to recoup losses.

presidential impact

Presidential cycles also have a historic impact on markets, Stovall said. And that’s good news for today’s investors.

According to a CFRA analysis from 1944 to today, the average return on the S&P 500 during the second and third quarters of a president’s second year in office is negative, but markets rebound in the fourth quarter, with an average increase of 6 .4%.

The third year of a president’s term is by far the best performer on average, with S&P 500 growth jumping about 16%.