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 A bear market is officially here thanks largely to stubbornly high inflation.

For many of us, it has probably felt like a bear market for a while now, but the S&P 500 Index didn’t close more than 20% below its January 3 record high until Monday, June 13th. Tech stocks are down a lot more—the Nasdaq Composite is more than 32% below its November 2021 record high. 

Stock market volatility is not uncommon.

In fact, the average intra-year decline in the S&P 500 is 14%. Volatility is even more pronounced in a mid-term election year (such as this year) with an average intra-year declines of 17%. 

However, despite equity volatility being normal, investors have felt more pain than usual this year as a result of volatility also in the bond market.

In fact, 2022 has provided the worst start on record for the bond market (as measured by the Bloomberg US Aggregate Bond index). As of the end of May, the index is down -8.92%. For context, the worst full-year performance for this index was -2.92% in 1994. (For reference, 1995 provided one of the best full year returns on record at 18.47%). 

The volatility in bonds is being driven by a variety of factors including inflation, geopolitical issues, and the Federal Reserve increasing interest rates and reducing their balance sheet. 

Bonds (or fixed income) are often used in portfolio to reduce overall portfolio volatility.

However, given dramatic bond volatility in 2022, bonds have been unable to meaningfully reduce total portfolio fluctuation. Investors are feeling the pain across almost all their investments. 

For those worried the Fed may be overly aggressive in its fight against inflation, consider the market has done a lot of work already.

Home price appreciation has slowed on higher mortgage rates. Lower stock values will likely slow spending. Wage increases have leveled off as layoff announcements have started to hit the newswires. Financial conditions are already tightening early in the Fed’s campaign. This is all actually good news, since these factors suggest the Fed may pause its rate hiking campaign in the fall. 

Keep in mind a good part of the inflation problem is on the supply side (COVID-19, supply chain disruptions, Russian oil sanctions), so there’s only so much the Fed can do by curbing demand. While some of these supply issues may take many months to resolve, we believe they will be resolved before long. While oil prices are a wildcard, we are confident that a sizable piece of the inflation problem will get better in the months ahead and that patient investors will be rewarded. 

So now that the bear market is here, what should investors expect?

Stocks are near their average decline in a bear market without a recession at about 24%, potentially introducing an attractive risk-reward trade-off for stock buyers here. Monday’s trading session also got us closer to the type of capitulation and indiscriminate selling that has marked prior major lows. 

Here’s another encouraging statistic to help investors stay the course.

After the S&P 500 enters a bear market, the median 12-month gain has been 24% with advances in seven of the past 10 instances back to 1957 Even better, the average historical 12-month gain off a midterm election year low is over 30%. 

Time horizon is imperative in times like this.

If you have immediate cash needs, it’s essential you work with your advisor to ensure there is ample liquidity in your account(s). However, if your investment time horizon is long-term, history suggests that sticking to your investment plan – or even adding additional funds to buy into market weakness – is a decision that can provide long-term rewards. 

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Important Information 

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. 

All data is provided as of June 14, 2022. 

All index data from FactSet. 

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. 

Personal consumption expenditures (PCE) is a measure of price changes in consumer goods and services released monthly by the Bureau of Economic Analysis (BEA). Personal consumption expenditures consist of the actual and imputed expenditures of households; the measure includes data pertaining to durables, nondurables, and services. It is essentially a measure of goods and services targeted toward individuals and consumed by individuals. 

The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a market-based estimate of future volatility. When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive it does measure the current degree of fear present in the stock market. 

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.