Third Quarter Commentary 2022
Happy October! While I hate seeing the end of summer, I am glad to be finished with the last quarter as it pertains to the investment markets.
For the quarter, the stock market (as personified by the S&P 500) is down just about 5%. That isn’t a huge loss, but through the end of August, the same index was up over 4%. This may not be the month you open your account statements if large losses bother you.
Who could have predicted this? On Independence Day, if I told you the Federal Reserve was going to raise interest rates twice, as promised, and that energy prices would be down 25% or more by the end of the quarter, would you predict an overall gain or loss?
That all seems like good news. Gas prices are down. The Fed followed their plan. The markets should be up. But they aren’t. What is going on?
Fear of a recession!
We’re not in a recession, per se. (Let’s define a recession how we think of a recession – it is a time when unemployment is up and corporate profits are down.) But people are afraid we could be soon.
Corporate profits continue to rise and employment continues to be strong. But higher interest rates and signs of recession overseas have US investors spooked.
On a day-to-day basis, this past month has felt very much like the fall of 2008. I’m sure you don’t recall much from that time. I lost so much sleep from September 2008 to about June of 2009 that the events are seared into my memory.
Back then, we would see three or four days of hard losses in a row. Each day would tease us with a moment or two where it appeared the market was fighting to regain some ground. By the end of each of those days, the market would be down to a new record low.
But one day out of every 3-4, you would see a solid gain. Usually, two percent or more. You’d have a breather and think, “This isn’t so bad. We can make this up.”
The next day would begin another 3-4 days of hard losses.
This repeated from September all the way through early March, ending in a loss of over 40%.
Fortunately, we’re not facing anything near the financial crisis we did in 2008. I’ve heard many folks say, “Well, it could,” as if mirroring a short-term trading issue is mirroring the crisis we experienced 14 years ago.
We’ve forgotten how terrible it was back then.
- Brokerage firm Merrill Lynch went bankrupt and was taken over by Bank of America.
- Wachovia Bank went bankrupt and was taken over by Wells Fargo.
- The federal government supplied nearly $1 trillion in bailout money to US banks.
There was a real concern that the entire loan crisis was going to destroy the entire financial system. That’s a good reason to panic. It’s probably a very appropriate reason to panic.
We are panicking in 2022 because. . . maybe. . . soon. . . we might have a recession.
Seems a bit like an overreaction, don’t you think?
I fully believe that we are headed for a recession in the next year or two. Recessions are necessary parts to our economic growth. Without a period of rest and recovery, our economy will stagnate and become inefficient.
The losses we experienced in September are losses you’d expect in the middle of a recession, not on the prospect of one.
Recessions are not fun. People lose their jobs. The stock market wavers. Uncertainty abounds.
But the back side of a recession – the next recovery – corrects the mistakes of the last economic cycle and creates growth we couldn’t imagine just a few months earlier.
If you are a regular reader of my weekly emails, you know that one of the biggest economic problems we have currently is an inefficient labor market. After almost a decade and a half without a recession, the average worker – especially workers under the age of 35 who have never experienced an economic downturn – is not working to their full potential.
Inefficient workers lead to higher prices. They lead to a lack of innovation. They gum up the works of an economy. A recession resets the employer/employee relationship. Workers improve efficiency and displaced workers expand into new areas of the economy we didn’t know existed prior. (Think of the many folks that were programmers in 1999 that were displaced in 2001. Within just a short time, they all found employment in new sectors of the economy.)
When will we experience the next recession? It might be this year. Or it might be in 2023. I would estimate that it will happen before the end of 2024.
How should we react? That’s probably our biggest question.
If you are a longer-term investor - which most folks are - then you should not be concerned with the short-term aspect of a recession.
In five years, do you believe that the economy will be stronger than it is today? If so, a short-term downturn is irrelevant. It stands to reason that an economy that is stronger in 5 years will lead to higher stock prices over that same time period.
Can you take advantage of a potential downturn? Yes!
For many managed clients, we often watch for milestone moments in the stock market. As the market hits certain levels on the way down, we are inclined to purchase more of the stock funds we own.
This isn’t for every client at every milestone. Each individual client is different. Different goals, different income needs, different portfolio sizes. By and large, we are buying as the market falls.
This can cause your portfolio to rise much quicker than the overall market as the economy recovers. Because of the purchases, you have more dollars invested at lower prices. (Just remember to reduce your stock exposure as the markets recover or you will be over-invested in stocks.)
Overall, our recommendation at this point is to look towards the long-term but be prepared to act contrary to the market forces and buy as prices drop in the shorter-term.
For Managed Clients
Many managed clients have seen a flurry of fixed-income or bond trades in the last few weeks. We have sold off many of our bond funds and moved that money into Treasury bonds and CDs. We are quite excited about the yields we are receiving.
As mentioned above, if the markets continue to fall, we are prepared to move more money into stock mutual funds. That will be decided on a client-by-client basis.
As always, thank you for your continued support. If you have questions or issues, do not hesitate to reach out.
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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service. Statistics and other figures are accurate at the time of original publishing. Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the reader's own situation or concerns. Always count your change.