The S&P 500 (SPX) dipped another 4% on Monday, bringing 2022’s year-to-date return to -21.9%. The index stood at its all-time high (4796.56) at the end of the first trading day of the new year, but it’s been drifting lower as the war in Ukraine escalated, and COVID-19 shows no sign of going away.
The bottom seems to have fallen out now that inflation is getting worse, not better. The Bureau of Labor Statistics’ Consumer Price Index (CPI) rose 1% in May and has a trailing 12-month increase of 8.6%, the largest 12-month increase since 1981.
Inflation continuing up even after the Federal Reserve recently raised interest rates by half a point has some investors worried that an even bigger increase is on the horizon. The CME Group now sees a 28% chance of a three-quarters of a percentage raise, up from 3% a week ago. Federal Reserve Chairman Jerome Powell previously said such a rise was not currently on the table, but desperate times sometimes call for desperate measures.
With a recession a seemingly forgone conclusion at this point, investors will need to be very careful where they place their bets. While pretty much everything should decline in a recession, assets considered more speculative will get hit especially hard.
We’re already seeing this play out in cryptocurrency. The industry’s bellwether, Bitcoin (BTC), has lost 20% in the last week after already being cut in half over six months. With no history of performance during a recession and a sky-high price of over $23,000, there is plenty of room for more downside.
Even gold, traditionally viewed as a stronghold during downturns, has been getting hit; after peaking in mid-March, the price of gold has declined over 11%. Still, it’s up modestly year to date, proving the loyalty of gold investors.
It seems that no matter where you turn to right now, there will be some pain. The stock market and its bloated valuations are likely to see further downside. Holding cash subjects one to inflation of over 8%. Bonds bought today will be worth less each time they raise interest rates. Value stocks that pay a dividend might be one of the better assets to weather the storm with, especially if you’re reinvesting dividends at lower and lower prices.
The S&P 500 last traded at $3,738.48, down -0.3% on the day. YTD, SPX is down -22.06%.
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Disclaimer: Wealthy VC does not hold a position in any of the stocks mentioned in this article.