The Good, The Bad & The Ugly ~ Q3 In Review and Investing for the Long Haul
Simply put, the third quarter was ugly. However, it is in times like this when your financial plan really comes into play. Resisting fear-based actions and staying resilient are critical and allow for hidden opportunities to be uncovered and acted upon for long-term gain. This is when our partnership matters the most.
Let’s reflect back on the last three months and then look forward to how we are positioned for the remaining quarter of 2022 and beyond.
The Good
The Conference Board Consumer Confidence Index® increased in September for the second consecutive month. The Index now stands at 108.0 (1985=100), up from 103.6 in August.
The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—rose to 149.6 from 145.3 last month.
The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—increased to 80.3 from 75.8.
The S&P Global US Manufacturing Purchasing Managers’ Index (PMI) was revised higher to 52 in September of 2022 from a preliminary of 51.8 and above 51.5 in August.
In the September housing market, housing starts showed an increase of 12.2% month over month. Additionally, existing home sales beat expectations at 4.82 million vs. prior month of 4.80 million.
At the Federal Reserve’s September meeting, Chairman Powell noted that wage growth remains elevated, job gains have been robust, and the unemployment rate remains low in the labor market.
While still ending the quarter with losses, the Consumer Discretionary and Energy sectors proved the most resilient in the third quarter.
The Bad
The August Consumer Price Index (core) came in hotter than the markets expected, up 0.60% vs. estimates of 0.35%. When food and energy were included, the data showed just a slight increase of 0.10% versus the expectation of a slight decline of 0.10%.
Retail sales started to show some pull back with negative growth month-over-month in July and August.
Mortgage rates for 30-year mortgages rose above 7% at the end of September.
The Fed raised the federal funds rate by 75 basis points (bps) to 3.00% -3.25% in September; the third consecutive 75bps increase. The Fed cited continued elevated inflation, the war in Ukraine, elevated wage growth, and a desired slowdown in the growth of spending as the main reasons for its actions.
Emerging markets underperformed their developed counterparts in the third quarter.
The Ugly
After a rally in July, both stocks and bonds turned lower and registered negative returns for Q3.
Any hopes of interest rate cuts were dashed as central banks reaffirmed their commitment to fighting inflation. The Federal Reserve, European Central Bank and Bank of England all raised interest rates in the quarter.
The Federal Reserve revised down its estimate for GDP in 2022 from 1.7% to a mere 0.2%, commenting that “there is a very high likelihood of much slower growth” ahead. The forecast for GDP in 2023 now sits at 1.2% and 1.7% in 2024.
The Communication Services sector, including both Telecoms and Media stocks, was among the weakest sectors over the quarter, along with Real Estate.
Applying Historical Experience to Q4 and Beyond ~ Stay the Course
As we enter the final quarter of 2022, the markets and economy are still facing numerous challenges from high inflation, ongoing Fed rate hikes, and geopolitical instability. However, there are other indicators we can look to for meaningful insights into what we can reasonably expect in the months to come:
The market has declined substantially and, presumably, already priced in a lot of “bad news.”
Valuations on many quality companies are quickly approaching levels touched at the onset of the pandemic, while the S&P 500 more broadly is trading at a valuation that has, historically speaking, been attractive over the longer term.
Inflation has likely come close to peaking. Multiple inflation indicators are showing a peak and decline in price pressures, and while the Consumer Price Index remains far above the Fed’s target of 2%, any swift deceleration in inflation would likely be a material, positive catalyst for both stocks and bonds. According to the Fed’s estimates, interest rate increases will begin to slow in the coming months, and the last rate hike for this cycle could occur in March 2023 or sooner.
While geopolitical tensions remain elevated as Russia has recently escalated the war in Ukraine, most Western countries remain united in their opposition to the Russian invasion of Ukraine. Any reduction in geopolitical tensions could provide a boost for global risk assets, including U.S. stocks and bonds.
The U.S. consumer and corporate America have proven resilient over the last several quarters of market and geopolitical volatility. Most measures of U.S. economic growth remain in solid shape, while U.S. corporate earnings estimates have stayed largely elevated.
History tells us that during previous periods of similar macroeconomic turmoil, positive surprises have occurred, and markets eventually recouped the losses and moved to meaningful new highs. There is no reason to think this time will be any different.
We understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon. Even extended bouts of volatility like we have experienced so far this year are unlikely to alter a diversified approach set up to meet your long-term investment goals.
You will see trade confirmations as we tweak your portfolio, but generally speaking, we are going to manage to your financial plan; one that is based on your financial position, risk tolerance, and investment timeline. We will hold positions in bonds that maintain stability for your overall portfolio in the short and long term, and actively remove positions that have been downgraded. We will also take advantage of opportunities to buy fundamentally undervalued equities, all while considering any tax or capital gain implications. What you should be seeing in your portfolio is a methodical execution of our investment philosophy to best position you for long-term success.
We are here for you. Please do not hesitate to contact us with any questions, comments, or to schedule a meeting to review your financial plan and portfolio.