By Haddon Libby

The S&P 500 stock index was up 90% during the three years ended 2021 despite a pandemic and supply problems.  Throwing the Russian invasion on top of this was the proverbial straw that broke the camel’s back.  Stocks have had the worst first half since 1970 with the S&P 500 declining by 20%.  Despite this decline in 2022, the index is up 51% over that 3 1/2 year period.

With the money supply tightening, interest rates increasing and price spikes in fuel and food, declines should be no surprise.  Recent reports suggest that the U.S. economy may be officially in a recession.  During the first quarter, GDP (Gross Domestic Product) fell by 1.6% after a surprise 6.9% growth number in the fourth quarter of last year.  Early estimates suggest that GDP was flat to slightly down for the second quarter due to sharply higher food and fuel costs.

Inflation is in the 8-9% range excluding food and fuel and twice that if added.  Such high levels of inflation have led us into a recession despite nearly full employment.


Looking at stocks, since World War II the average downturn in prices during recessions has been 24% with three of the largest downturns occurring over the last generation. Given that businesses and consumers entered the current slowdown in far better financial shape usual, it is reasonable to believe that this bear market will not be as steep as average.  The 20% decline in the S&P 500 this year ranks as its tenth largest decline since World War II.

The largest decline over the last eighty years occurred during the Great Recession of 2007-2009 when stocks fell by roughly two-thirds.  The burst of the bubble back in 2001 caused equities to fall by nearly 50% while the 2020 COVID-induced flash crash led to a market decline of 33%.  Going back to the energy crisis of 1973-75, prices fell 47%.

We should be prepared for continued market struggles until the issues causing the current slide begin to resolve.  With food and fuel supplies tight due to the loss of Russian and Ukraine production, we should continue to experience higher prices until the supply and demand equation reaches a better balance.  We will also need to see China fully reopen its production as the ‘zero COVID’ policy hampers the supply of many goods and products consumed globally.

While those factors are enough to slow demand and push us into a recession, the aggressive actions of the Federal Reserve have caused the US Dollar to go up in value by 8.5% versus other currencies around the world.  A stronger currency makes imports more expensive and exports less attractive to global buyers as those currencies are worth less.

As the US is a net exporter of food and fuel, parts of our economy are benefitting from these global imbalances.  Gasoline prices are up 64% this year and more here in California due to our non-sensical gas production rules.  California has its own blend of gas that can only be produced in state, yet we do not have sufficient refinery capacity to avoid regular price spikes.  California refiners can export to other states which further tighten supplies.

Prices for soybeans corn prices are up 25% this year while wheat is up 13%.  Expect prices to increase once summer production ebbs and supply from Russia and Ukraine do not reach markets.  California could help in resolving this problem, but we would need to allow water desalination plants.

Sadly, the increased move to electric vehicles (EVs) is straining our already inadequate energy grid.  From 6p-11p, our state has rolling brownouts and black-outs as the grid does not have enough power to facilitate the charging of existing EVs.  As the state is doing little to resolve this problem, expect a worsening of the power shortage over time.

As you can see, we live in an inter-connected world where supply and demand imbalances can have a profound impact on the lives of everyone.

Haddon Libby is the Founder and Chief Investment Officer of Winslow Drake Investment Management.  For more information on Winslow Drake, please visit us at