Quarterly Newsletter for the 4th Quarter 2022
The first three quarters of this year have been unusual- to say the least. Not unusual in terms of the stock market losing value and not unusual in terms of the bond market losing value; but, unusual in terms of both of them losing value at the same time. In point of fact, we have only witnessed this about 2% of the time in the investment market. On a price return basis, the Dow Jones Industrial Average (DJIA) was down 20.95% year-to-date through September 30. The Standard and Poor’s 500 (S&P 500) was down 24.77%, while the NASDAQ was down 32.40%. Overseas, the MSCI all Country World ex-US Index dropped 26.50% year to date. In the fixed income environment, the Barclays Merrill Lynch 3-month Treasury Bill Index yielded 0.61% year-to-date, but the Bloomberg Aggregate Bond Index was down 14.61%.
Fixed Income Market (Bonds): The Federal Reserve has been and continues to be the driving influence behind the bond market. As stated in our newsletters in both April and July, the Fed is raising interest rates in an effort to control inflation. They will be meeting again at the beginning of November and another 0.75% increase is expected. This will be the sixth rate increase this year and a seventh increase is expected at the December meeting. Looking into the future, many are predicting that the Fed will continue on this path (raising interest rates) into 2023 until the economy is too tight and the Fed will be forced to lower rates. As the Fed continues to telegraph rate increases, the U.S. continues to operate in an “inverted interest rate” (when short term rates are higher than long-term rates) environment. Of concern to us is that the actions taken by the Fed today will affect the economy mid to late 2023. If the Fed does not orchestrate a “soft landing” (adjust interest rates in such a way as to not hinder the economy) we could easily see a recession next year. On the other hand, there are some indications (i.e. housing cost) that inflation is no longer as high as it was; thus, the Fed might become a little more “dovish”.
US Equity Market (Stocks): The Russian/Ukrainian war, inflation, and the threat of recession have been the major influences on the stock market so far this year. Now, the mid-term election in early November has come into play. The Russian/Ukrainian war has certainly upset energy supplies- in Europe and around the world. Recession and/or the threat of a recession are driving investors to safety. Inflation has a significant impact on individuals, leading to a slight decline in consumer spending on non-essential goods. The LEI (Leading Economic Indicator) Index is now negative. Nine of the ten indicators tracked are “weak to fair”. Only one indicator in strong- unemployment. Corporate earnings, however, are coming in mixed, which is better than feared. Throughout all of this, the US economy is still strong, and we are coming into the holiday season which typically produces positive results. The market seems poised to rebound as it seems to be searching for any good news from the Fed.
Overseas Equity Market (Stocks): China continues to be an issue as it manipulates its own stock market and injects governmental control over its economy. Additionally, their zero COVID policy has continued to lead to lock downs which, in turn, have impaired their manufacturing and exporting business. The war between Russia and Ukraine continues to drag on and it is almost a foregone conclusion that the energy and agricultural effects of the war will drive Europe into a recession. The dollar, however, has gained strength overseas- driving down the comparative value of foreign corporations.
Conclusion: As we stated in our last newsletter, selling stocks in a crisis is very likely to result in missing part of the recovery. As we write this newsletter, the market has produced a double-digit gain in the month of October. We believe the midterm elections will favor the Republicans and they should capture control of the House and possibly the Senate. Should this happen, the stock market could see some significant increases. The market likes governmental gridlock as it gives corporations comfort that nothing will be happening on Capitol Hill- they have some element of certainty. We are still guardedly positive on US equities markets in the short term and very positive in the long-term. With rising interest rates, we remain negative on the long-term fixed income market and favor short-term bonds. This position may change quickly, depending on the path forecast by the Fed during November and December. On the overseas market, we remain short-term neutral, however, with the value of the dollar being as strong as it is, we see a good buying opportunity and are positive long-term.
In closing, permit us to express our sincere appreciation for the opportunity to be of service to you. As always, should you have any questions or wish to discuss the above in more detail, please do not hesitate to contact us.