• Midterm election years have not treated the stock market well. Since 1960 the S&P500 has had declines of 19% or more 14 times. 10 of those declines occurred during a midterm election year. One cynical theory is that monetary and fiscal policies tend to be tighter during midterm election years, but get loosened as policy makers try to boost the economy before presidential election years.
• Bloomberg’s survey of 72 economists last week showed that the median forecast for the probability of a recession over the next year had risen to 27.5%. This reflects an increase of 7.5% compared to last month. The survey indicates that many economists now believe that inflation will persist into the future, leading to a slowdown in consumer spending.
• Since the S&P500 hit its low point on March 8^th the index has risen 7.6%, cutting its loss for the year down to around -6%. One reason for the rebound may be the historical precedent of previous interest rate hikes. In the five rate-hiking cycles since 1990, the S&P500 fell in the month after the first rate hike but was higher one year later 80% of the time.
• Corporate bonds have lost more than 7% in 2022. This is its worst performance since 1980. Despite this poor return the bond market may not be predicting a recession. Right now investment grade bonds and high yield bonds only yield around 1.5% and 3.5% more than treasuries, respectively. In contrast, when recession worries were high during the pandemic, high yield bonds had a yield 11% larger than that of treasuries.