The U.S. equity market and bond market simultaneously entered a bear market last year – an uncommon event. Behind both Bear markets are inflationary supply side constraints and government Fiscal and Monetary Policy mistakes. The Federal Reserve (Fed) is closer to the end of its rate tightening cycle, the fastest ever, aimed at slowing economic growth which in turn should lower inflation that reached a 40-years high. I think this Bear market ends when the Fed stops hiking the Federal Funds Rate (FFR) this quarter. Every Bear market is followed by a Bull market. Investors are very close to the shore…stay invested.

Stocks and bonds posted their third consecutive quarter of negative returns, as aggressive monetary tightening has taken a toll on equity and fixed income valuations. The S&P 500 Index is down 24.9% Year-to-date (YTD). The conventional “all weather” 60% Equity/40% Fixed-Income portfolio is down 20.1% YTD according to Morningstar – worst on record. Higher rates have adjusted valuations down for both stocks and bonds closer to normal levels associated with slow economic growth.

The S&P 500 had its worst first half of a year in more than 5 decades and so did the Bond market. What happens next? My assessment is that S&P 500 Index bottoms setting stage for stocks to rally over next twelve months. A normal Bear market last on average 11 month and declines 28% on average. This Bear market is in its 7th month and has given up intra-day gains of 24.5% from it’s high. The decline in stock values reflect stagflation economic conditions. The S&P 500 Index could decline another 4% from here if economy is just in a shallow recession (3% or less contraction in real economic growth).

In the first quarter, the S&P 500 Index corrected intraday 14.9% from its high, and on a closing basis 13% implying that the U.S. economy is in a growth scare rather than an impending recession. By quarter end, a broad rally in stocks recovered more than half this correction losses. This was the worst correction since the start of the Covid pandemic two years ago. A faster tightening cycle by the Federal Reserve, runaway inflation and Russia’s invasion of Ukraine all contributed to the stock market’s correction.

The S&P 500 could retest current correction low if inflation does not peak in Q2. Parts of the Treasury yield curve inverted, typically a harbinger of a recession ahead. The yield curve subsequently quickly un-inverted to a positive sloping curve making an argument for growth ahead not a recession. The 3 months-to-10-years Treasury Yield Curve, a more reliable indicator, remains steep signaling no recession ahead. Which way the market goes depends on the path of inflation. If the Fed through its front-loaded hikes cannot curb inflation soon then expect a recession and down market in stocks over next twelve months. Furthermore, weighing on stocks is the upcoming Mid-term election. Historically stocks correct sometime from May through October period before Mid-term election.

The bottom line, this will be a transition year for the U.S. economy but worth the pain. Does anyone really expect that transitioning from abnormal monetary policy (zero Fed Funds rate in an economy that grew at 5.7%) to more normal monetary policy will happen smoothly? In the end the U.S. economy will be better off with normal yields and rates and so will income investors.

There may be room for investors to gain from stocks later this year. The S&P 500 typically peaks 18 months after an inversion and a recession typically starts shortly after that – late 2023. It takes around a year for stocks to peak after a point of the Yield Curve inverts, and the S&P 500 usually trades higher by 15% during that period, according to JPMorgan. Following the Midterm election, this November through April 2023, S&P 500 enters its historically best return period of the Presidential cycle, with past returns strongly positive one hundred percent of the time according to the Stock Trader’s Almanac. Given inflation recedes and U.S economy avoids a recession, stocks would rally. For the time being, I am only buying stocks at lower entry levels than today’s market level. I expect to be overweight stocks again before Midterm election day.

Despite recent slowdown in economic growth related to Omicron effects, the U.S. economy remains in expansion mode. The CNBC Survey of Economist is projecting a median 4.3% real economic growth in 2022. A peak in Omicron cases and effective viral vaccines could bring about yet another Spring re-opening phase. Supply bottlenecks and shortages are a work in process that eventually fixes itself resulting in a moderation of inflationary pressure. Inflation pressures are peaking but will linger. Investors should consider high quality companies with pricing power offering dividend growth. Prepare for higher market volatility stemming from Fed tightening, geopolitical risks (Russia), slowing China economy, and the midterm elections. The period before midterm election is known for corrections due to uncertainty of outcomes. I would be a buyer in any midterm election correction.

U.S. major equity indexes pulled backed five percent in September; a month known for corrections. The pullback in stocks brought major indexes back to levels where indexes stood three months ago. Year to date stocks are outperforming bonds by a wide margin. Most bond sectors are on track for a negative year. The stock market enters a seasonally strong investment period by the end of October. I expect major equity indexes to move modestly higher in a choppy fashion into year-end.

U.S. major equity indexes pulled backed five percent in September; a month known for corrections. The pullback in stocks brought major indexes back to levels where indexes stood three months ago. Year to date stocks are outperforming bonds by a wide margin. Many bond sectors are on track for a negative year. The stock market enters a seasonally strong investment period by the end of October. I expect major equity indexes to move modestly higher in a choppy fashion into year-end.

U.S. equity indexes advanced higher in second quarter ending June 30th. Favorable U.S. news on Corona virus, vaccinations, re-openings, robust economic growth, and record corporate earnings fueled the advance. Stock market is vulnerable to bouts of higher volatility in the coming months which is typically a seasonally weak investment period.

The global economy continued its strong path to recovery, expanding last quarter at its fastest pace in over 15 years, according to the latest global Purchasing Manager Indexes. Vaccination rollouts, the easing of stringency measures, monetary and fiscal stimulus, have contributed to the boom and broadening of the global economic recovery.

U.S. equity indexes advanced higher in second quarter. Favorable U.S. news on Corona virus, vaccinations, re-openings, robust economic growth, and record corporate earnings fueled the advance. Stock market is vulnerable to bouts of higher volatility in the coming months which is typically a seasonally weak period.

Major U.S. equity indexes advanced higher in April hitting record levels. The S&P 500’s market breadth has been broad a sign that there are more gains ahead. But first the market may pullback in the face of overbought conditions and seasonally weak investment period ahead.

Monetary and fiscal stimulus, along with the unleashing of trillions of dollars in economic activity as vaccines re-open economy, should be enough to keep the market trending higher this year. Cyclical stocks sensitive to economic growth are outperforming defensive stock sectors - a harbinger of better times ahead.

The markets are concerned about a contested election and the possibility of tax and regulatory increases in 2021 under a Biden presidency. The stock market hates uncertainty and so market volatility should remain elevated until after the election.