The first half of 2022 finished with global market declines not seen in half a century. The primary culprit was rising interest rates and accelerating inflation that fueled a months’ long rout, leaving few markets untouched.
From January 1 through June 30, the S&P 500 Index of domestic large-cap stocks fell 21%, suffering its worst six-month decline to start a year since 1970. Investment-grade bonds, as measured by Vanguard’s Intermediate-Term Investment-Grade Fund (VFIDX), posted their worst start to a year in history.
Volatility in the markets extended beyond stocks and corporate bonds. Data from Freddie Mac shows that in March alone, the 30-year fixed mortgage – the most common type of mortgage in the U.S. – surged an incredible 24%, the fastest four-week increase for mortgage rates in history.
Dimensional Fund Advisors (DFA) reminds us that one of the best predictors of the economy is the stock market itself. Markets tend to fall in advance of recessions and start climbing earlier than the economy does. As the below shows, returns have often been positive while in a recession (shaded in green).
When reviewing the market report from the second quarter, DFA reinforces three lessons investors should stick to during market volatility.
- A recession is not a reason to sell.
- Time the market at your peril.
- It may be a good time to reassess your portfolio and your plan.
DFA sums it up best … “A sound approach to investing—through a plan, a well-designed portfolio, and an advisor—is the ultimate self-care during these rough markets. Your future self will thank you.”