World equities have lost more than $20 trillion in value this year since peaking in January, and the sharp decline reflects the blow to global financial markets in early 2020 due to pandemic-driven recession concerns.
To put the magnitude of those losses into context, the more than $20 trillion wiped out from global stock markets since January this year is more than six times India’s total gross domestic product (GDP) — at about $ 3.2 trillion.
That loss is almost the size of the total GDP of the United States of about $23 trillion and about one-fifth of the world’s GDP of nearly $100 trillion.
The GDP data referenced is based on the latest World Bank data.
But the worst is not over for global equities as safe-haven sentiment is once again rampant over expectations for a global recession, driven by the aggressive policy tightening of major central banks in their fight against decades-long inflation.
Economists have increased the likelihood of a recession in the United States and Europe, citing aggressive rate hikes and the war in Ukraine.
That’s despite colossal wealth thus far and some bruising in the first half of the year, as most major financial markets are firmly anchored in bear market territory.
But a Reuters report showed that half-month price changes since 1930 show that the first two weeks of July offered the best returns of the year historically for S&P 500 investors.
Graphic: S&P 500 rendement return
After three consecutive quarters of declines for S&P 500 stocks, with the index falling a fifth or 20 percent since the beginning of the year, some investors said they are ready to buy the dip. The S&P 500 has risen slightly so far this month.
History offers ground for hope in the near term amid a bleak backdrop for equities, Paul O’Connor, chief of multi-asset at Janus Henderson Investors, told Reuters.
“We’re seeing a record discount, a really big rebalancing of stocks, probably… in Europe and the US. Of course just rebalancing because we’ve had such a big drop in stocks,” he said.
But after the first two weeks of this month, the outlook does not bode well for equities as market participants advise caution and anticipate a stormy few months ahead for risky assets amid rising interest rates and concerns about economic growth.
Indeed, risk-off sentiment has resurfaced amid fears of a recession, and the rising cost of living has kept consumers wary. By contrast, a rise in energy prices and a range of economic indicators have rekindled concerns about the health of the global economy.
The first six months of the year were tough for investors.
Goldman Sachs analysts said a 60/40 portfolio strategy, which follows a standard portfolio technique of holding 60 percent of its assets in equities and 40 percent in fixed income, posted the worst first-half return since 1932, dropping 17 percent. and UBS suggested using stock sell-offs and volatility to build longer-term positions, according to Reuters.
“The problem is that if we look beyond that[two week window]things look tricky,” O’Connor told Reuters. His team will use every possible season increase in July to sell in the rally.
UBS and Goldman Sachs advised building protection against a potential economic slump, which would weaken corporate earnings expectations, Reuters said.
Earnings season could lead to new sell-off in global equities
In a separate report, investors and analysts warned that the upcoming corporate earnings season could lead to another sharp drop in global stock prices, with earnings forecasts looking far too optimistic given mounting recession risks.
The Reuters report showed that valuations have fallen below the historical average, which could tempt bargain hunters. However, recent earnings warnings from US companies have worried traders about a series of downgrades as rising energy and other input costs bite and consumers cut spending.
Emmanuel Cau, a strategist at Barclays, told Reuters that earnings “took over from valuations as the next market engine”.
Equity markets may struggle to bottom out until earnings forecasts are revised downwards, according to the British bank. That’s because high earnings expectations “optically deflate” company valuations to levels that could mislead investors.
“There have been very few downward revisions to corporate earnings; there is still too much optimism. That’s why we expect another correction when earnings are published, and with this volatility, one really risks taking a beating,” said Francesco Cudrano, advisor at Simplify Partners, quoted by Reuters.