London (CNN Business)Few investors will have experienced a tougher beginning to a year than the six-month stretch that just finished. Professionals have been beaten down, while amateur traders — used to 2021's eye-popping rallies — were dealt a harrowing reality check.
What's happening: The S&P 500 notched its worst start since 1970, plunging 20.6% between January and June. The Dow had its largest first-half drop since 1962, and the Nasdaq Composite had its largest percentage decline ever.
A nasty combination of circumstances has been hammering stocks. Russia's war in Ukraine has driven inflation higher, exacerbating concerns about how aggressive central banks like the Federal Reserve will need to be to rein it in. That's boosted fears of a recession this year or next. Coronavirus lockdowns in China, the world's second-largest economy, have also fed anxiety.
Predicting what will happen in markets over the next six months is unusually difficult. The path forward remains treacherous, with the Fed pledging to move one month at a time.
"It's all about inflation right now," Markus Schomer, chief economist at PineBridge Investments, told me. "That's the only thing that matters, and how the Fed responds to it."
Optimists believe that at this point, the bad news is mostly priced in. Schomer noted that the core Personal Consumption Expenditures price index, an inflation measure that strips out volatile food and energy costs and is watched closely by the Fed, increased by 4.7% year-on-year in May, down from 4.9% in April.
"I think the picture is starting to come together," Schomer said. "Supply chain disruptions are easing everywhere. Commodity prices are not coming down yet, but they're not going up as fast either. All we need is oil to stay at $100 [per barrel] and inflation will come down."
That's a big "if," of course, given the state of energy markets. Rising rent and housing prices — a stickier form of inflation — also require monitoring.
But Schomer thinks stock market sentiment is likely to improve in the second half of the year as investors realize the situation isn't as bad as they previously thought and bet on the Fed successfully bringing down inflation without triggering a recession.
"I think we probably have a stabilizing market in the second half as we churn through this information," he said. He predicts stock markets will finish the year above current levels.
Others remain skeptical that the worst is behind us. Strategists at Goldman Sachs told clients on Thursday that stocks could keep falling later this year since "equities are pricing only a mild recession" and more companies will likely begin reducing their earnings expectations.
In the event of a recession, Goldman's team sees the S&P 500 dropping to 3,600, or 4.9% below Thursday's close.
What everyone agrees: It's going to stay rocky for some time, and iron stomachs will be necessary. The Fed's job remains difficult, and there's a big risk it goes too far, lifting borrowing costs so high that it really hurts business activity or consumer spending, and sends growth into reverse.
"Until the growth/inflation mix improves, markets are likely to remain volatile as investors shift between inflation frustration and recession obsession," Goldman's strategists said.
OPEC and allies stay the course as oil prices pull back
The Organization of the Petroleum Exporting Countries and allies including Russia will stick with their strategy of steadily increasing oil output despite pressure from the West to do more to help lower crude prices.
The latest: The OPEC+ group previously decided to increase production by 648,000 barrels per day in July and August. It announced Thursday that it's sticking with that plan.
That means that as of August, production cuts announced in 2020 to cope with the effects of the pandemic will have been "fully unwound," according to Giovanni Staunovo, an analyst at UBS.
Global oil prices have dropped from nearly $123 per barrel at the beginning of June to below $112 as recession fears have come to the fore. Demand for fuel falls when the economy contracts.
But a number of factors could push oil prices higher over the medium-term. Europe is working to quickly reduce its reliance on Russian oil, heating up competition for alternative barrels. Additionally, OPEC+ is only likely to meet half of its goal for increasing production in August as spare capacity dwindles, Staunovo noted.
"Several members are already struggling to increase production in line with the deal," he said in a note to clients.
That means crude prices should climb as demand continues to outstrip supply. Staunovo forecasts a global oil price of $130 per barrel in September.
Watch this space: The price outlook will further focus attention on President Joe Biden's trip to Saudi Arabia scheduled for the middle of this month.
Biden said Thursday that he doesn't plan to directly ask Saudi Crown Prince Mohammad bin Salman to increase the kingdom's oil output, and that the responsibility lies with a broader group of Gulf states.
High gas prices won't stop record July 4 car travel
After years of postponed vacations and caution, Americans are eager to travel — and refuse to be deterred by high energy prices.
Nearly 48 million people are expected to travel 50 miles or more from home for the July 4 holiday weekend, according to AAA. That's a 3.7% rise compared to 2021 and brings travel volumes almost back to 2019 levels.
Expensive gasoline isn't getting in the way. AAA forecasts that 42 million people will hit the road between June 30 and July 4, a record.
"Earlier this year, we started seeing the demand for travel increase and it's not tapering off," said Paula Twidale, senior vice president of AAA Travel. "People are ready for a break and despite things costing more, they are finding ways to still take that much needed vacation."
On the radar: As global oil prices have receded, the national average for a gallon of regular gasoline has dropped back to $4.84 from an all-time high of $5.02 in the middle of last month.
But surging demand for fuel over the summer, which is peak driving season, will serve as another source of upward pressure.
The ISM Manufacturing Index for June, which tracks the US industrial sector, arrives at 10 a.m. ET.
Coming next week: Economists expect to learn that America added 295,000 jobs in June. That's still strong, but lower than the 390,000 increase in May.