Even traditional shelters offered little protection in the first half
Martha and the Vandellas’ “Nowhere to Run” was one of the most popular singles of 1965, but the classic Motown hit might as well be the official soundtrack for the investment in 2022. Not only did the S&P 500 have posted its worst first half of the year in over 50 years and fell further into bearish territory, but nearly every other asset class – the glaring exception being fossil fuels – posted negative performance.
The chart below shows several industry and sector indices that we follow closely here at US Global Investors. Each of them finished the first half of 2022 in the red.
Even traditional shelters offered little protection. Bonds have historically shone when stocks plunged, but Treasuries and municipals sold off in the first six months. Gold was mostly flat, down just over 1%; Meanwhile, gold miners were among the biggest gainers in the first quarter, but subsequently fell sharply as soaring fuel prices weighed on earnings.
Some people have argued that Bitcoin could replace gold as a store of value, but the digital asset just ended its worst month on record. The crypto has lost over 38% of its value in June alone, and for all of 2022 so far, it is down around 57%.
If you are contrarian, this can be an interesting buying opportunity. Bitcoin’s 14-week Relative Strength Index (RSI) now matches its most oversold levels on record, at the start of 2015 and the end of 2018. Many are doing so today. I will simply say that if you had accumulated Bitcoin when the RSI was this low, you would have seen incredible returns. (Past performance is not indicative of future results.)
A “perfect storm” of factors
So how did we get here? Current market conditions were largely triggered by a perfect storm of rising interest rates, soaring inflation, record fuel costs and the end of easy money. In other words, Powell & Co. pulled the brakes just when the economy appeared to be slowing.
Copper is often referred to as “Doctor Copper” because its price action has predicted economic ups and downs with a relatively high level of accuracy. This year the red metal, found in almost everything, has fallen below its 50-day moving average the most since 2011, when copper lost a third of its value.
You don’t need to follow the copper market, of course, to know that conditions may deteriorate. According to a just-released Gallup poll, Americans’ views on the economy in June fell to their lowest level since the financial crisis.
The US economy may already be in a recession, which occurs when gross domestic product (GDP) contracts for two consecutive quarters. Real GDP fell at an annual rate of 1.6% in the first quarter, and the Atlanta Fed now expects a contraction of 2.1% in the second quarter.
On top of everything else, it’s a midterm election year for a first-term president (whose approval rating, I must point out, is down). Historically, this has resulted in additional market volatility as the feuds between the two sides escalate. According to Jeff Hirsch, editor of Stock Trader’s Almanac.
Outlook for the rest of 2022
Investors are now wondering where they can hide for the rest of 2022. As I said in a previous post, gold has been one of the few bright spots this year. It managed to stay mostly flat even though the value of the US dollar surged, which is more than we can say about almost anything else. I expect him to perform as well, if not better, in the second half.
There is no doubt that it has been a very difficult market environment to navigate, and we expect more of the same. The Fed will continue to tighten monetary policy, and the longer the conflict in Ukraine persists, the longer we are likely to feel the pressure of high gasoline prices. A “war tax”, if you will.
Everything is extremely oversold and investors may be tempted to start speculating. No one can say what will happen next, but keep in mind that we may not have found the bottom. I would be very careful before making big bets.
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Originally published by US Global Funds on July 5, 2022.
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The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices of US companies. The Hang Seng Composite Index is a market capitalization-weighted index that includes the top 200 companies listed on the Hong Kong Stock Exchange, based on average market capitalization for the 12 months. The S&P Global Luxury Index is comprised of 80 of the largest publicly traded companies engaged in the production or distribution of luxury goods or the provision of luxury services that meet specific investment requirements. The S&P Municipal Bond Index is a broad market value-weighted index that seeks to measure the performance of the US municipal bond market. The S&P Global Natural Resources Index includes 90 of the largest publicly traded companies in the natural resources and commodities sectors that meet specific investment requirements. The Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions. The NYSE Arca Global Airline Index is a modified equally weighted index designed to measure the performance of highly capitalized and liquid international airlines. The NYSE Arca Gold Miners Index is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in gold and silver mining.