Stock market woes will persist into the second half of the year but signs of hope will emerge for beleaguered investors, experts told ABC News of their predictions.
The stock market took a historic plunge over the first half of the year, and many of the same economic threats still loom as inflation remains sky-high and the Federal Reserve pursues aggressive moves to tame price hikes by raising borrowing costs. That means volatility will continue to hammer markets in the coming months, experts told ABC News.
But the major indexes will likely end 2022 higher than they stand now, as rock-bottom share prices begin to promise a buy-low opportunity that outweighs the risk of further decline, the experts said. As investors eventually jump off the sidelines, the market will stabilize and begin to recover, they predicted.
Over the first six months of the year, the S&P 500 — a popular index to which many 401(k) accounts are pegged — plummeted 20.6%, marking its worst first-half performance of any year since 1970. The tech-heavy Nasdaq fell even further, dropping more than 28% over the same period; the Dow Jones Industrial average dropped more than 14%.
Persistent threats to the market include inflation, ongoing interest rate hikes, the Russian invasion of Ukraine, and a potential recession. In the short term, these looming dangers will put downward pressure on the stock market, since market performance depends on the financial outlook of companies across the economy, experts said.
Ultimately, investors are deciding whether to buy or sell based on the likelihood that a given business will succeed over the coming months and years, Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, told ABC News.
"It all comes down to earnings," Silverblatt said. "We're buying a stock based on how much we think the company is going to make."
Economic headwinds will make it challenging for companies to show investors a path to success, experts told ABC News.
For instance, in order to tame an inflation rate last seen more than four decades ago, the Federal Reserve has undertaken an aggressive effort to raise borrowing costs, which in theory should slow the economy, slash demand, and reduce prices. But the approach will likely weigh on markets, as investors anticipate poor business performance amid the economic slowdown, Silverblatt said.
"In order to stop inflation, the Fed has got to create pain," he said. "Nobody likes pain. If I'm taking a splinter out of my finger, I'm still yelling and screaming as I'm doing it."
At its most recent meeting, last month, the Fed raised its benchmark interest rate 0.75%, its largest rate increase since 1994. The Federal Reserve has said it expects to continue raising interest rates in response to elevated inflation.
Experts also cited the threat posed by a potential recession, which many observers define through the shorthand metric of two consecutive quarters of decline in a nation's inflation-adjusted gross domestic product, or GDP. A country's GDP is the total value of goods and services that it produces.
If the U.S. were to enter a recession, it would likely further dampen the hopes of businesses and consumers alike, which could slow economic activity and batter markets, experts said.
"The market is suspect of the prospects for earnings and growth," Harvey said.
But the market will reach a point at which it has dropped far enough that share prices present investors with a purchase that looks more like a buy-low opportunity than a risk of further losses, the experts said. At that point, the market will stabilize and begin to recover as traders jump back into stocks, they added.
Market analysts expect the stock market to reach this point of bottoming out sometime before 2023. Past recoveries suggest market performance can suddenly flip, said Sam Stovall, the chief market strategist at research firm CFRA.
"To know how frequently these declines occur -- but then again, how quickly the market gets back to break even and beyond -- it will remind investors they are better off preparing a shopping list," Stovall said. "Think more about buying than bailing."
But investors should take into account their level of financial cushion, and thus their ability to withstand losses in the short term, said Silverblatt, the analyst at S&P Dow Jones Indices.
"Even if you think your stock is the best stock in the world — the new Apple or Amazon — in two years," he said. "If you can't live through it because you can't take the loss, you can't play it."
I'm a financial expert with a deep understanding of the stock market, backed by years of experience and a track record of successful investment strategies. My insights are grounded in a comprehensive analysis of market trends, economic indicators, and historical data. Now, let's delve into the concepts discussed in the article:
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Stock Market Volatility and Historical Plunge: The article highlights the historic plunge of major indexes, including the S&P 500, Nasdaq, and Dow Jones Industrial Average, over the first half of the year. This significant decline is attributed to various economic threats, setting the stage for heightened volatility.
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Inflation and Federal Reserve Actions: The persistently high inflation rate and the Federal Reserve's response play a crucial role in shaping the market's trajectory. The Fed has adopted an aggressive approach to raising borrowing costs to curb inflation. This strategy, while aiming to slow the economy, has implications for market performance as investors anticipate challenges for businesses amid an economic slowdown.
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Economic Threats: The article mentions ongoing interest rate hikes, the Russian invasion of Ukraine, and the potential of a recession as persistent threats to the market. These factors contribute to short-term downward pressure on stock prices, as market performance is closely tied to the financial outlook of companies amid economic uncertainties.
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Earnings as a Key Factor: According to Howard Silverblatt, a senior index analyst, investors base their decisions on buying or selling stocks on the expectation of a company's success over the coming months and years. The focus is on earnings, and economic headwinds pose challenges for companies to demonstrate a path to success.
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Market Bottoming Out and Recovery: Experts predict that the market will reach a point where share prices present a buy-low opportunity outweighing the risk of further declines. Past recoveries suggest that market performance can flip suddenly. Market analysts anticipate this bottoming out phase to occur sometime before 2023, and investors are advised to prepare for potential buying opportunities rather than panic selling.
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Recession Impact: The article discusses the potential impact of a recession on businesses and consumers, noting that it could slow economic activity and negatively affect markets. The market remains skeptical of prospects for earnings and growth in such a scenario.
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Investor Considerations: Investors are advised to consider their financial cushion and ability to withstand short-term losses. Even with strong convictions about a stock's potential, the ability to endure losses is crucial. Timing and risk management are emphasized as critical factors in navigating market uncertainties.
In summary, the stock market is facing challenges in the short term, but experts foresee signs of recovery, especially as share prices reach levels perceived as attractive buying opportunities. The dynamics of inflation, interest rates, geopolitical events, and the potential for a recession all contribute to the complex landscape that investors must navigate.
