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Stocks suffered their worst first half of the year since 1970. What's next?

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Americans with stock portfolios or retirement investment plans would likely prefer to forget the last six months.

The S&P 500, Wall Street's broad benchmark for many stock funds, lost 20% through the end of June after starting the year at an all-time high. It's the worst start to a year for stocks since 1970, according to calculations from Axios.

As the Federal Reserve has raised interest rates sharply, trying to tame the fiercest inflation in four decades, investors have grappled with uncertainty and fear. Higher rates can bring down inflation, but they also slow the economy, raising the risk of a recession. That's helped drag down the value of stocks, bonds, cryptocurrencies and other investments.

The S&P 500 tumbled into a bear market on June 13, and is now 20.4% below its January 3 all-time high — back to where it was in late 2020.

"[T]he good news is that H1 is now over. The bad news is that the outlook for H2 is not looking good," Deutsche Bank's Jim Reid said in a research note.

The market rout has wiped out $3 trillion in value held in 401(k)s and IRAs — a major setback for soon-to-be-retirees that underscores the riskier nature of today's retirement plans. Typically, a 401(k) takes about two years to recover its value after a market setback of this magnitude.

"Younger people, you can kind of wait it out," Alicia Munnell, director of the Center for Retirement Research at Boston College, told CBS MoneyWatch recently. "But people who use their retirement money to support themselves really suffer in this kind of event."

Fed "playing the hand they were dealt"

The Fed has been at the center of the market's downturn, raising its key short-term interest rates three time this year. Its most recent increase earlier this month was triple the usual amount and its biggest hike since 1994. More outsized increases are almost certain.

"You can argue that they're just playing the hand they were dealt, but the reality is they got caught a little bit behind the curve and their pivot toward a much more aggressive policy stance has been the reason the market has sold off," said Ross Mayfield, investment strategist at Baird.

One winner, many losers

Technology companies, retailers and other stocks that were big winners during the pandemic have been among the biggest losers this year. That includes a more than 35% tumble for Tesla, a 70% nosedive for Netflix and a more than 50% plunge for Facebook parent Meta.

The tech-heavy Nasdaq composite has lost 29.5% of its value since the start of the year.

Rising bond yields have made these stocks look overpriced relative to less-risky corners of the market, such as utilities, household goods makers and health care firms. These are often called "value" stocks to distinguish them from stocks of high-growth companies.

Energy is the lone gainer this year among the 11 sectors in the S&P 500. The sector is up 29.9% so far, buoyed by surging oil and gasoline prices. Of the 25 stocks in the index that have risen more than 20% this year, all but eight are energy companies.

What’s driving inflation, high gas prices? 07:25

Pain at the pump—gain for investors

The soaring prices at the pump are the result of a classic squeeze.

Demand surged for gasoline and other oil products after the economy roared out of the cavern created by the coronavirus. At the same time, supplies for crude oil and gasoline have remained tight. Russia's invasion of Ukraine upset a key energy-producing region of the world, with sanctions blocking oil from Russia, which was the world's third-largest oil producer at the end of last year.

Meanwhile, refineries have less ability to turn oil into gasoline in the U.S. after several shut down during the pandemic. U.S. refining capacity has dropped for two straight years, according to the U.S. Energy Information Administration.

As a result, gasoline prices have shot to records this year, with the national average for a gallon of regular topping $5 per gallon earlier this month, according to AAA.

That's meant misery for many drivers, but a nice payoff for investors who bet on energy stocks.

For such strength to continue, though, worries about a recession would have to abate. Recessions have historically led to drops in oil prices by destroying demand. And over the last week, stocks of energy companies have dropped even more than oil prices as some investors grew more fearful of just such a scenario, according to strategists at Barclays.

What’s driving inflation, high gas prices? 07:25

Busted bonds

Bonds are supposed to be the steadier, more reliable part of a portfolio. But they not only slammed investors with losses in the first half of this year, they're on pace for one of their worst performances in history.

High-quality, investment-grade bonds were down 11.3% for the first six months of 2022, as of Monday. Any down year is a notable thing for bonds. The Bloomberg US Aggregate index, which many bond fund use as their benchmark, has had just four losing years on records going back to 1976. 

Treasurys did even worse, with Deutsche Bank's 10-year Treasury index having the worst six months on record, going back to 1788.

This year's losses are entirely the result of high inflation and the Fed's response to it. Inflation is generally anathema to investors because it erodes the purchasing value of the fixed payments bonds will make in the future.

The yield on the 10-year Treasury has already more than doubled this year. It stood at 2.98% Thursday afternoon. More pressure may be on the way as the Fed keeps raising rates, though some analysts say the worst of the damage may have passed.

Strategists at the Wells Fargo Investment Institute recently hiked their forecast for where the 10-year Treasury will end this year to a range of 3.25% to 3.75%. But they also see it moderating the next year to a range of 2.75% to 3.25%.

Crypto crashed

Supporters of cryptocurrencies have touted them as, among other things, a good hedge against inflation and a safe haven when the stock market slumps. They've been neither of those things this year.

Bitcoin sank from nearly $69,000 in November to below $20,000 this month, partly due to the same forces that pummeled stocks: inflation and higher interest rates.

Some events unique to the cryptocurrency industry also factored in and eroded investors' confidence. A so-called stablecoin collapsed, costing investors around $40 billion. A hedge fund dedicated to digital assets was reportedly facing liquidation. And some bank-like companies, which take cryptocurrencies as deposits and then lend them out, suspended withdrawals as they scrambled to shore up their finances.

What could happen next? 

Economists believe that inflation will ease in the second half of the year, but there are also ongoing concerns that the Fed's regime of interest rate hikes could push the economy into a recession. No wonder that investors are cautious about the remainder of 2022.

In the meantime, some investors are seeking to shift money into more inflation-proof investments, such as commodities and managed futures, noted Peter Essele, head of portfolio management for Commonwealth Financial Network, in a research note. But there's some data suggesting that inflation has peaked, which means such investments may not provide the same returns as earlier this year, he added.

And history shows that years that start off poorly often rebound, noted LPL Financial Chief Market Strategist Ryan Detrick in a research note. 

"As bad as [the first half of 2022] has been for investors, the good news is previous years that were down at least 15% at the midway point to the year saw the final six months higher every single time, with an average return of nearly 24%," he added.

CBS News' Irina Ivanova and Aimee Picchi contributed reporting.

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