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Third Quarter Comes To A Close..

October 3, 2022

Greetings,

The third quarter wrapped up last week with the S&P 500 down 4.88% for the quarter and 23.87% YTD.  Bonds, as measured by the U.S. Aggregate Index struggled as well finishing the quarter down 4.75% and 14.61% YTD.  We are on pace for the worst year on record for the U.S. bond market.  Bottom line, third quarter statements will be ugly.  Markets sold off on worries of the FED hiking rates too aggressively, possibly pushing the U.S. economy into a recession.  As Yogi Berra once said, "It's Deja Vu all over again".  I did take advantage of some of the selling and added to U.S. stocks across Moderate to Aggressive Growth portfolios and I will continue to take advantage of traders’ continued pessimism.

 

Once again, we feel the market fears are overblown and do not forecast an imminent recession.  However, there is an increasing risk that the FED does get too aggressive with rate hikes and does indeed tip the economy into a mild recession - I can no longer rule out that possibility based on the latest "Fed-Speak".  In my opinion, the FED is talking tough to make up for the fact they were so wrong about inflation just a year ago.  If you recall, last September, FED Chairman Powell said inflation was just "transitory" and did not anticipate any need to hike rates in 2022.  Let's hope they don't get it wrong again by getting too aggressive as we continue to see signs of inflation cooling as commodity prices are still dropping, shipping rates are well off their highs along with housing and rents starting to roll over - all good news on the inflation front.

 

People often ask me what will happen if we do indeed fall into a recession.  By definition, a recession is two consecutive quarters of negative economic growth as measured by GDP.  Although we can’t predict the future, especially when it comes to the markets, we can learn a lot from the past.  According to CNBC, since 1950 the average stock market decline when a recession hits, is 31%, which we are very close to already.  The average return 1 year from those lows is 23%.  The average total return 3 years after is 47% and the average return 5 years after is over 100%.  Those numbers tell me not to panic.  Patience, though likely starting to wear thin, will prove to be the winning strategy.  Also worth noting...history shows us that FED rate-hike-induced recessions are typically mild and shallower than average.

 

Third quarter corporate earnings announcements kick off next week and overall, earnings are still expected to rise 5%.  While the economy is indeed weakening, by and large, U.S. corporations continue to weather the storm and are still growing earnings which is what matters most when it comes to stock performance.  The September CPI (Consumer Price Index) will be announced on October 13 and is sure to be a market mover.

 

One last point to put this year's selloff into perspective.  I pulled up a chart of the S&P 500 from January of 2009 through January of 2020.  There is a pretty clear trendline that the market followed, and average annual returns were about 11.8%.  From January 2020 to January of 2022, the S&P 500 went up about 50% in those two years. From the lows of the pandemic, the market went up a staggering 100%.  This year's pullback has basically washed out the excess returns of those two years and the market is sitting right back at the long term trendline, and the average return from January of 2009 to today is back to 11%. S&P 500 profits have grown by about 10% per year over the same time period.  What is the average annual return of the market post World War II?  11.19%.  

 

As I always, I will continue to monitor market and economic conditions and act accordingly. 

 

Please let me know if you have any questions.

 

Regards,

 

Larry


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly

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