The current calendar year has not been kind to financial markets, with major indices descending steadily from their 2021 all-time highs. After experiencing an all-time high of approximately $4,818 in December 2021, the S&P 500 retreated to a 52-week low of $3,636 in June 2022. The same market conditions have applied for the Dow Jones Industrial Average and NASDAQ, both of which experienced comparable descents over the past seven months.
Such bearish conditions are familiar territory for formerly red-hot growth stocks, which have been championed by the headline-making CEO of Ark Invest, Cathie Wood, and which witnessed astronomical share price appreciation in 2020 and much of 2021. However, as a representation of these aforementioned sector's broader performance over the past year, The Ark Innovation ETF (ARKK) is down approximately 72% from its 2021 highs.
Nevertheless, as of July 2022, recession fears have begun mounting, driven in large part due to two consecutive quarters of negative GDP growth (i.e., 1.6% and 0.9%, respectively), which many economists use as the textbook definition for a recession. In stark contrast to this definition, the Biden administration, U.S. Federal Reserve Chairman Jerome Powell, and Treasury Secretary Janet Yellen all remain confident that these figures are not a true reflection of current economic conditions due to a simultaneous 3.6% unemployment rate, among other more encouraging figures.
With this in mind, the question remains: where are financial markets heading from here amidst recession and inflation concerns, and how can investors prepare for the year to come?
On Thursday, July 28th, Treasury Secretary Janet Yellen commented, “Even in the face of global headwinds, including a war in Europe and successive variants of the pandemic, our economy remains resilient.” The following day, Cathie Wood reiterated her belief that growth stocks will outperform as the broader market turns from bearish to bullish. However, not all market players share these rosier outlooks, with Goldman Sachs Research estimating 2022-2023 recession probabilities of 30% for the United States, 40% in Europe, and 45% in the United Kingdom. Needless to say, there appears to be no consensus regarding market direction.
Ultimately, current conditions may be presenting investors with opportunities to scale into long-term positions by dollar-cost averaging at seemingly depressed prices. However, it remains to be seen whether this is a period best suited for building cash positions in preparation for a more concrete recessionary environment or following Cathie Wood’s growth-oriented approach. Only time will tell.