Q3 2022 Client Commentary: Higher Volatility in the Cards
The 3rd Quarter began with a nice relief rally which felt really good compared to how the market had been misbehaving; however, the fun was short lived. In August, the Federal Reserve began getting very nervous about unabating inflation. Consequently, they instituted 2 back to back 75 basis point interest rate raises in order to try to combat the rising rate of inflation. So far, inflation remains seemingly stubborn, and the Fed seems more undeterred than ever in their hawkish stance to cool the present problem. This is a classic example of where economies and capital markets have different objectives. Our belief is that the Federal Reserve will probably overdo the necessary economic medicine which will most likely inspire some level of a recession. We believe that a recession began in 2022 anyway, and it will probably hangover for the first half of 2023. So, with all this good news, what do we do?
There are 5 actions that we believe are intelligent at this time in terms of helping ourselves: first, do no harm. In other words, this is not the time to be selling your grandmother’s Bank of America stock. We have to remember, there are 2 types of stocks: eggs and tennis balls. We have made it our company’s focus to own the tennis balls. The tennis balls are the stocks that are going to “bounce” after the economic storm is finished. You can almost look at any period of time in the past 50-75 years and within five years of the lows experienced during the correction, these stocks were significantly higher, if not doubled in value from those lows. Second, identify your fear. If you are worried about the dip in your portfolio’s value, just remember the returns of 2020 and 2021. Markets can get very scary on the downside, but the upside is historically longer and larger. Therefore, the real risk for people today is pulling their money out of the market and not getting back into it to experience the recovery. Third, if you have “high interest rate debt,” do your best to settle it or refinance at lower rates. Rates are higher than they were but are still historically on the low side. Fourth, make sure you have 6-12 months of liquidity in the bank or short-term treasuries. Today, one- and two-year treasuries are yielding over 4%. Fifth and finally, call us and let us help address your concerns. We all understand that for many of us, this volatile market period is turning out to be one of the toughest we have experienced. Nevertheless, markets have always returned in the past, and we have no reason to believe that this in not the case today. Therefore, don’t second guess, these corrections are pretty cyclical, and we actually believe that now is a time to begin considering some great companies to buy at single digit price earnings multiples.
|Q3 2022 Return
|Foreign (EAFE & EM)
|U.S. Barclay’s Agg Bond
The indices simply confirm that there has been no place to hide form the downturn. Inflation is the biggest impediment for stocks. Once the Federal Reserve eases back on the hawkish throttle, stocks will rise again. The geopolitical noise of nuclear wars and the Ukraine don’t help, but markets have found a way to overcome threats of wars. Lastly, the rise of U.S. dollar will make quarterly comparisons more difficult with large overseas conglomerates. Having said all of that, we do believe it’s usually darkest before the dawn, and this time is no different.