2022 Q3 Market Commentary…
There are a lot of shoes dropping now on the U.S. economy that we have been forecasting in previous newsletters. Inflation is running hot. Economic growth, as measured by GDP, is slowing. Interest rates are climbing. Supply chain bottlenecks still exist. Gas prices remain elevated. Housing demand is cooling. Residential rental rates are climbing. Consumer credit is at an all-time high. Consumer confidence is weakening. You get the point. The list is long.
When markets are under extreme duress, the one question we all really want answered is “How much lower will the stock and bond markets go before we bottom out?” While we await the answer (which only ever reveals itself in hindsight), we are forced to grapple with the prospect that markets could get worse before they get better. To further complicate matters, we get brief rallies in markets – called “bear market rallies”- that play with our psyches and create more confusion about market direction.
In the second quarter, economic conditions turned on a dime for the worse. There is no sugarcoating it. The stock market showed it. The bond market showed it. In fact, the first half of 2022 was the worst performing first half of a year since 1970. Here are the 2022 first half performance numbers through June 30:
The Federal Reserve is walking a tightrope between staving off a recession and getting inflation under control. If they raise interest rates into a weakening economy, it can accelerate recession risk. If they don’t raise them, they risk inflation spiraling higher. After more than a decade of “low interest rate, easy credit” monetary policy, investors around the globe are feeling the negative effects of this policy shift.
Unfortunately, asset values suffer greatly from the Fed’s conundrum, and those values may stay in the pressure cooker until inflation subsides significantly enough. It’s not easy to unwind inflation without crushing economic growth. The process can be choppy and stressful, and I would expect that to be the case between now and the end of year.
Allow me to drop a few promising facts to keep you looking at the bright side…
- Every bear market in history has been usurped by a stock market recovery to new all-time highs
- Adding to 401k’s, IRAs and Roth IRAs in bear markets offers you attractive entry price points
- Stock and bond markets often anticipate and price in recessions before they occur
- The average length of a bear market is 11.3 months while the average length of a bull market is 4.5 years (*1)
In 1997, I was driving up Interstate 10 in Arizona and saw a vanity license plate that read “Dow 20K”. It seemed like such a stretch to me then since the Dow was barely trading above 7K at the time. Look at where it trades now. We’ve lived through a tech bubble burst, a terrorist attack of 9/11, the financial crisis of 2008, the COVID crash of 2020, and we are in the middle of another one. Yet, we’re still north of “Dow 30k”.
Investing requires fortitude. As investors, volatility is what we must endure to gain future reward. Don’t let the short-term economic events of today derail your long-term vision for your financial future.
Source (*1): First Trust – History of Bull and Bear Markets