If you own a global equity fund, you should be aware of the fact that the market could be headed for a major correction. According to recent research, the S&P 500 index could fall by 20% this year and be in bear market territory by June 15 of 2022. Recession fears are rising ahead of this week’s pivotal Federal Reserve meeting. Here are some possible reasons why the markets could be headed for a downturn this year.
The market may face several hurdles in the next six months, with investors worried about a possible Fed interest rate hike and rising inflation. It could also experience a global recession. These are just some of the most common risks facing global equity funds today. Here are some possible scenarios for the next six months:
First, the fund’s tracking index is composed of 100 stocks. Each holding has a market cap below $1 billion, and its weight is assigned 1% during quarterly rebalancing. China, India, and Japan were among the worst performers in 2021, but Taiwan ranked second in 2022. These three sectors should be kept separate for now. The Morningstar Global Equity Funds’ performance is far from over.
Similarly, aggressive investing can go sideways. In 2022, corporate America will have a tougher time growing. Investors should focus on companies with quality, rather than growth potential. The new $1.2 trillion Infrastructure Investment and Jobs Act should provide some support. However, it will be crucial to be selective in this market. If you want to avoid a big hit, try a lower cost, high yield fund that focuses on value and yield.
Government bonds have been on the rise as well. Early this year, they reached their highest level in five years. Shorter-term stocks, meanwhile, have enjoyed greater growth as yields have been on the rise. However, investors have been buying bonds as a hedge against a stock market downturn. Furthermore, bonds offer a safe haven in times of higher interest rates and inflation. As of early May, individual investors poured $20 billion into U.S. Treasury ETFs, the largest four-week cash inflow in three decades.
The Fed’s aggressive monetary policy tightening has made global markets more volatile, putting more pressure on global stocks. Investors are fearful that the Federal Reserve will overshoot in its attempts to control inflation, which could tip the economy into recession. In response to this uncertainty, international stocks outperformed U.S. stocks in recent months, allowing investors to chase yields and cash flow.
As the S&P 500 forward earnings yield has fallen, investors should focus on relative value of different sectors. Compared to bonds, real estate, materials and professional services have been among the sector sectors that have been seeing the strongest earnings revisions in the past four weeks. The overall industrial sector has fared relatively well over the past four weeks. But as of June 15 2022, the case for further outperformance is weak. Meanwhile, hostilities in Iraq and Ukraine may ease up and Europe’s growth outlook could improve.