The numbers in the May column on the chart below bely the trauma investors experienced through the month. All the major equity indexes hit their worst levels of the year (so far) in the middle of the month. At their Year-to-Date worst, at mid-month, the S&P was off – 18.2%, Nasdaq -28.0%, Russell 2000 -23.5%, EAFE – 18.3%, and EM – 19.8%. If you compare these “worst” numbers to the YTD column below, you get a sense of the strength of the rebound rally that occurred in the final week of May – it was the strongest week in years. The month of May was anything but close to unchanged as the numbers would have you believe.
By July of 2021, it was estimated that the U.S. government had spent at least $5.2 trillion in stimulus to combat the Covid crisis. In May of 2022, it is estimated that more than $7 trillion has been lost in market value from the S&P 500 stocks when the index was down -18%. These gigantic numbers are not directly related to one another, but you intuitively might imagine that the bulk of the Unwind has taken place. It is not a stretch to say the further losses, beyond what we’ve already seen are directly related to whether the Fed fights inflation into a recession. To stretch this point a little further, one could easily make the argument that just tipping into a recession is already discounted into market prices today.
A true bottom in the market usually includes a test of lows. I can easily imagine a test of the mid-May lows in the weeks ahead. But without a deep recession in the next 12-18mo, we may have seen the order of magnitude of the markets 2022 Unwind already.
Be well,
Mike
Source: Addepar, Bloomberg, Brookings Institute
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