Markets Suffer Worst First Half of a Year in Decades

At the Wall Street Journal, "Investors gird for more volatility; almost everything—from stocks to bonds and crypto—falls to start 2022":

Global markets closed out their most bruising first half of a year in decades, leaving investors bracing for the prospect of further losses.

Accelerating inflation and rising interest rates fueled a monthslong rout that left few markets unscathed. The S&P 500 fell 21% through Thursday, suffering its worst first half of a year since 1970, according to Dow Jones Market Data. Investment-grade bonds, as measured by the iShares Core U.S. Aggregate Bond exchange-traded fund, lost 11%—posting their worst start to a year in history.

Stocks and bonds in emerging markets tumbled, hurt by slowing growth. And cryptocurrencies came crashing down, saddling individual investors and hedge funds alike with steep losses.

About the only thing that rose in the first half was commodities prices. Oil prices surged above $100 a barrel, and U.S. gas prices hit records after the Russia-Ukraine war upended imports from Russia, the world’s third-largest oil producer.

Now, investors seem to be in agreement about only one thing: More volatility is ahead. That is because central banks from the U.S. to India and New Zealand plan to keep raising interest rates to try to rein in inflation. The moves will likely slow down growth, potentially tipping economies into recession and generating further tumult across markets.

“That’s the biggest risk right now—inflation and the Fed,” said Katie Nixon, chief investment officer for Northern Trust Wealth Management.

Ms. Nixon said she would be keeping a close eye on economic data to gauge how much rising interest rates are weighing on growth over the next few months. Her firm has kept money in U.S. stocks, wagering the economy will slow down but avoid a recession. It has also put money into companies focused on natural resources, a bet that should pay off if inflation persists for longer than it expects.

“You don’t want to be whipsawed by the markets,” she said.

The good news for investors is that markets haven’t always done poorly after suffering big losses in the first half of the year. In fact, history shows they have often done the opposite.

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.

One reason markets have often snapped back after big pullbacks: Investors have eventually stepped in, wagering prices have fallen too far. Fund managers currently have larger-than-average cash positions, smaller-than-average equities positions and a markedly high degree of pessimism about the economy, Bank of America found in its June survey of investors. Those factors, among others, make markets look “painfully oversold”—and thus potentially ripe for a rally, the bank’s strategists said in a separate report.

But even those finding buying opportunities these days say they are focusing on specific companies, instead of buying broadly. They concede that the current economic environment—in which inflation is high, borrowing costs are rising and growth is expected to slow—makes it difficult to be enthusiastic about many parts of the market.

Economists surveyed by The Wall Street Journal in June said they saw a 44% probability of a recession in the U.S. in the next 12 months, compared with 18% in January.

History also has shown the Fed has seldom been able to pull off a “soft landing,” a scenario in which it slows the economy enough to rein in inflation but avoids tightening monetary policy to the point of causing a recession. The U.S. went into recession four of the last six times the Fed began raising interest rates, according to research from the Federal Reserve Bank of St. Louis that looked at monetary policy tightening cycles since the 1980s.

“The runway for the Fed to manage a soft landing is not only narrow but also winding and bumpy,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments...