Fall 2022
A gloomy Year 11/22
At the end of the 3rd quarter 2022 the gloom in the markets continued. Year to date, the S&P 500 was down 28%, the Nasdaq Composite was down 32%, the MSCI ex US (proxy for foreign markets) was down 28% and the Bloomberg AGG (proxy for Fixed Income) was down 14%
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The typical portfolio consisting of 60% Equity and 40% Fixed Income was down almost 20%, suffering on of its worse losses in years. Normally the fixed income in a portfolio acts as a ballast to the equity volatility. So far in 2022, that is not the case.
Headwinds that have battered markets this year remain in place.
For starters, rate hikes. The Federal Reserve continues to hike the fed fund rate. A series of 75 basis points (1 bp = 0.01%) hikes has raised the Fed Funds rate to 3.75%. The Federal Reserve is signaling to maintaining its aggressive stance and suggested in its economic projections that we might see another 50 bp by year-end.
Why is the Federal Reserve raising interest rates at a pace not seen since the second half of 1980? (Rate data from the St. Louis Federal Reserve) Inflation remains stubbornly high.
Ultimately, price stability is the foundation of a strong economy and long-lasting economic expansion. But the Fed’s rate-hike hammer hasn’t landed without pain.
While the Federal Reserve is not publicly forecasting a recession, its latest set of projections released last month show it believes its inflation-fighting campaign will boost the unemployment rate next year.
Investors are also growing concerned the economy could sink into a recession next year, which would depress earnings.
In addition, the sharp increase in interest rates has led to a much stronger dollar since parking cash safely in the U.S. offers a higher return to foreign investors.
A strong dollar reduces the price of imported goods and the cost of an overseas vacation, but the rapid increase in the greenback against foreign currencies is raising fears the Fed could unintentionally “break” something in the financial markets, either at home or abroad.
It happened during the early 1980s, when sharp rate hikes put a heavy strain on Latin America, and again in 1994, when rate hikes exacerbated problems in Mexico, leading to a bailout. It also led to bankruptcy in Orange County, California.
I’m not forecasting an imminent financial crisis, and any unexpected shift by the Federal Reserve could alleviate financial market pressures.
That said, I recognized that the Fed’s steely resolve to bring down inflation has created pain in financial markets.
Bear history
Taking a longer-term view, I want to emphasize that bear markets eventually come to an end, and bottoms typically occur when negative sentiment is high.
According to [[https://www.schwab.com/learn/story/market-volatility Charles Schwab]], the average bull market since the late 1960s ran for about six years, delivering an average cumulative return of over 200% for the S&P 500 Index.
The average bear market lasted roughly 15 months, with an average cumulative loss of 38.4%.
The longest bear market lasted just over two and a half years. It was followed by a nearly five-year bull run. The shortest occurred in 2020 and lasted only 33 days.
One final remark
I won’t venture to guess how 2022 might end, and I would counsel against making portfolio adjustments based on a one-month time horizon.
There are a few lights at the end of the tunnel (hopefully not a locomotive). The bearish sentiment and positioning has allowed a significant rally to develop so far this quarter. Seasonal trading patterns favor a so-called Santa Claus rally into year end. Significant resistance is up at the 4150-4250 level in the S&P 500. This area encompasses the 200-day moving average, a 50% retracement from the years hi and low and the previous levels that rallies have failed.
The opinions expressed herein are those of Riverbend Planning Group. The data and opinions are furnished for informational purposes only and should not be considered a solicitation for an investment decision. Although it is derived from sources believed to be accurate, Riverbend Planning Group makes no guarantee to the accuracy of the information
