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Are Things Finally Improving in the Stock Market?

2022 has been a challenging year for investors. Yet in his June CEO Letter, Simon Erickson shares some optimism with investors and two stocks who might emerge stronger from the market's recent storm.

June 27, 2022

I broke my foot this past weekend. It was the perfect personal anecdote to describe how things are going in the market these days.

I’ve already heard several of the foot/market puns, complements of my witty friends and colleagues. If you’re feeling like your portfolio’s broken, I certainly feel your struggle. If you’re looking for someone to share your pain, I’m your guy. And if you need someone to help you crunch the numbers, this experience has really given me one leg up on the competition.

Thanks to the help of some crutches and a healthy diet of painkillers, I’m already on my road to recovery.

Yet symbolically, I feel like this also is a great reminder that the markets are going through their own healing process as well.

There have been several weeks here in 2022 where we’ve wondered if things could possibly get any worse. Riskier technology and growth stocks have been selling off for a full six months now, as an ongoing flight to safety has driven masses of institutional investors out of the Nasdaq and into less-risky assets. Larger, “safer” companies haven’t been spared either, with the S&P 500 as a whole descending into bear market territory in early June.

This selloff isn’t just impacting retail and institutional investors, but also the businesses themselves. CEOs are questioning if the market is having an identity crisis. And private companies looking to raise money are delaying their initial public offerings until conditions improve. Due to the lack of investors interest, there have been only 114 IPOs on American exchanges through May 31st of this year. That figure is down 78% from the first five months of (the somewhat euphoric) 2021.

What’s the Diagnosis, Doc?

So what’s the reason for the doom-and-gloom surrounding the stock market lately?

Many are pointing the finger at a long-overdue collapse of the previous bull market, which ran for more than twelve years and (many believe) was artificially propped up by government support. The Fed’s Zero Interest Rate Policy and considerable stimulus packages were intended to spur economic activity and stabilize markets after 2020’s COVID pandemic.

It worked. Consumers were getting checks in the mail, so they were going out and spending them. Borrowing money was cheap, so businesses put fresh capital to work on their latest growth initiatives.

But now, the buzz from the euphoric punch bowl is wearing off. We’re beginning to feel the sting of the economy changing directions, from a decade-plus of expansion back into a period of contraction.

There’s even commentary beginning to arise that our American economy is heading into a recession. Due to the Fed’s steep increase in interest rates, the yield curve inverted on April 1st; meaning the interest rate of the 2-year Treasury note exceeded that of the longer-duration 10-year note.

That is rare, and it’s important. There have only been four previous inversions during the past four decades. And each time, they resulted in a recession.

So When Do Things Start Getting Better?

Yet while the doom-and-gloom may be rapidly spreading, now might counter-intuitively be exactly the right time for optimism.

Those four previous yield curve inversions — the harbingers of the coming recession — also produced an average stock market return of 28.8% during the subsequent 18 months. That means that even though the economy was going into a recession, stocks actually rose by a significant margin.

Source: LPL Research

In other words, the bad news about the economy has already been more than priced in. The problematic indicators about inflation and interest rates are public knowledge, and those managing large funds have already completed their flee to safety. The stock market is a step ahead of the actual condition of the economy.

2 Companies Who Will Come Out Stronger

There are also silver linings hidden within the dark macro clouds, which benefit the right companies who are able to navigate this storm. Those who raised capital at favorable valuations in 2021 through SPACs, secondary offerings, or direct listings are now flush with cash, which can serve as a significant advantage over competitors.

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