After a turbulent first half of 2022, financial markets seemingly found a more secure foothold in July and part of August as stock prices recovered and a delicate optimism returned to the market. Inflation continues to be the predominant focus for investors as central bankers weigh the current economic trends against their own guidance for borrowing costs and easy money. However, much of that hopefulness was dashed after officials reiterated their resolve to fight inflation. In the past 12 trading days, the S&P 500 has slumped more than 10 percent as markets attempt to account for a more hawkish Fed, one that is willing to keep rates higher for longer in order to win its war against rising consumer prices. That same sentiment has fluctuated dramatically as news unfolds, as evidenced by today's market rally—after six days of losses, stocks are on track to end today in the green.
There is no doubt that this has been a difficult time for investors. There have been few points in history where market participants have had to deal with such a plethora of concerning factors including surging inflation and higher rates, recession talk and other economic troubles, spikes in foreign exchange rates, and unpredictable financial markets. However, with all these topics being thrown around, it's easy for the larger picture to get lost in the minutiae. Keep in mind, economists are projecting that US GDP growth will remain positive in the second half of 2022, with the economy growing by 1.6 percent for the year, according to Bloomberg.
In regards to share prices, the expectations for the upcoming earnings season continue to be resilient and the actual results could easily end up being better than many are fearing now. Wall Street analysts are forecasting mid-single digit growth in the third and fourth quarters, which will bring the calendar year earnings growth to about 8 percent—a fairly middle-of-the-road rise for most years. Even consumers haven't thrown in the towel: the Conference Board Consumer Confidence Index surprisingly rose more than expected in September, reaching its highest level since April.
At the end of the day, many of the current market concerns are just background noise to the larger issue: the Fed's fight against inflation. That will be the real test of whether the market may get some much-needed optimism, or further volatility. The September reading for consumer prices will be released in a few weeks, and could decide the direction of the markets for the remainder of the year. Investors will need to remain disciplined and keep a longer-term perspective. Sticking to the plan and not panicking during volatile times remains a cornerstone to investor success.