2022 is proving to be a historically challenging year for equity markets with the S&P 500 Index declining 23.87% and the NASDAQ Index retreating by 32% year to date as of September 30 (1). Rising interest rates are causing even the typically less volatile portion of portfolios, bonds, to decline in value. The bond markets have suffered with the Barclays US Aggregate Bond Index down 14.61% during this same period (1). Ongoing inflation, increases in interest rates and the continuing war in Ukraine have contributed to the market volatility this year. As you can see from these returns, not only have gains been elusive in 2022 but, in fact, there has been no real place to “hide” this year.
In his Mid-Year Market Reflection blog post, MFG President Pete Marshall shared that historically when the market loses 20% it is often one of the best times to invest. This could lead one to ask - are we now at the market low? Where equities will ultimately hit bottom depends on how well the economy holds up and in turn the direction that earnings take in the coming quarters.
It appears that we are in the midst of a strong downturn in consumer sentiment (as shown in the chart below). If past historical trends apply to this downturn, when the consumer sentiment index reaches a low point, the average subsequent 12-month S&P 500 return has been +24.9%.
It is important to remember that stock prices are an indication of what people are willing to pay for shares of a company, not necessarily a precise indicator of what the company is worth. The reasons for bear markets are seldom completely rational, which is why bear markets end and stocks often return to their original highs. In fact, following bear markets in the past the stock market overall has always surpassed the previous highs. The amount of time for this to occur is an unknown variable which reinforces the importance of a long-term investing perspective.
In response to the current level of inflation, the Fed appears poised to continue rate hikes in an aggressive way. The potential risk of doing too little to tame inflation is sometimes seen as far greater than the risk of doing too much. This thinking has helped drive a dramatic shift in monetary policy expectations this year, to an increased pace of rate hikes including the most recent 75 basis point rate hike in September, with more increases anticipated for the remainder of this year. The Fed has prioritized taming inflation moving forward, even at the risk of slowing the economy.
As the economy continues to slow, economic indicators further reflect increased recessionary trends. Although recessions are like death and taxes in that they cannot be avoided forever, they are a normal part of the economic cycle and can provide the potential for a buying opportunity. Recessions can also function to expose and eliminate waste and inefficiency, ultimately creating a stronger economy going forward.
Although the market’s bottom can only be known in hindsight, it is important to remember that bear markets do not last forever and typically provide excellent opportunities for long-term, patient investors. Bear markets have historically been good entry points for long-term investors.
We continue to evaluate strategic opportunities for each portfolio in light of the current market and economic conditions. Regular meetings with your advisor are designed to provide insight into these changes and overall strategy in addition to providing a chance to review and discuss your goals and the risk level of the portfolio. We contact clients on a regular basis to meet for reviews. However, sometimes life gets in the way and our attempts to connect may not have been successful. If you have not had the opportunity to meet with your advisor within the last year, please contact us to schedule an appointment.
Please reach out to us to discuss any concerns or questions that you may have.
(1) Data Obtained from Bloomberg as 09/30/2022
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