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Yesterday, we pointed out that the first half of the year was the worst for stocks since 1970. The S&P 500 dropped by around 20 percent, just shy of the 1970 bear market record of 21 percent. The Nasdaq Composite was down by 29.5 percent, the worst decline ever. The Dow Jones Industrial Average fell 15.3 percent, the worst since 1962.
We must confess, however, that things were even worse than we thought. Those declines are in nominal terms, meaning they do not take into account the massive inflation we’ve experienced in the first half of this year. Stocks were falling in dollars terms, but those dollars themselves were declining in value. As we’ve pointed out again and again, inflation introduces chaos into financial calculations that can often conceal deep points of economic stress.
Michael Hartnett, the chief investment strategist at Bank of America Securities, ran the inflation-adjusted numbers in a note for clients this morning. He found that this has been the worst start of the year for the S&P since 1872, the year Jesse James and Cole Younger led their gang to rob a bank in Columbia, Kentucky, and ended up shooting a teller who refused to open the vault.
As bad as that sounds, Hartnett points out that 2022 is looking like the worst year for government bonds since 1865. Government bonds fell 15.4 percent in the first half of the year, even before adjusting for inflation. Year over year, they were down by around twice that. And that is before adjusting for inflation (which is hard to do when measuring bonds issued in a variety of currencies from all around the globe.)
This does not mean that there was no money to be made in the first half of the year. As everyone knows, oil and gas prices have exploded higher. Commodities overall had their best inflation-adjusted first half of the year since 1946, according to Hartnett. Oil rose 46 percent, natural gas 74 percent, and iron ore 28.2 percent.