The bear market raged into the last day of September as the summer rally faded. Stock markets made new lows on September 30th. To put it into perspective, the Dow Jones Industrial Average fell 9.2% for the month, -21% for the first three quarters of 2022, still outperforming the S&P 500 and Nasdaq by a healthy margin.
Not only has the S&P 500 dropped 25% in 2022, but bonds of every ilk have also cratered, providing a double whammy not seen since the 1940’s. The Nasdaq lost a third of its value. Investment grade corporate bonds have declined by 20%. AGG or iShares U.S Aggregated Bond ETF lost 14%.
The Fed’s dogged fight verses inflation continues. We have 40-year high inflation numbers, i.e., CPI at 8.3% and core PCE over 6%, therefore Fed funds rates were pushed to 3.25% (all data according to Bloomberg). We expect several more rate rises into 2023.
The ten-year US Treasury bonds touched 4%. The two-year notes reached 4.3%. The US dollar hit multi-year highs and the British Pound Sterling hit all-time lows!
Earnings from major companies like Adobe, FedEx, Nike, Netflix, and Nvidia have come up short. Apple and Microsoft both have begun to break down technically, as stalwart bulls need to raise cash to meet redemptions. Small cap growth stocks are down 30%+.
The TINA stock market, as in “There Is No Alternative” to stocks, has ended as U.S. Treasuries provide much higher yields than the S&P 500.
AAII investor Sentiment has registered 60% bearish readings, which is similar to 2009 bear market low levels.
How did we get here? The rally out of the Covid downturn was euphoric in many areas, like hyper growths stocks, cryptos, SPACs, and private equity investments. The Fed prolonged the party in 2021, as did foreign central banks which continued to buy bonds, repress yields, and encourage speculators.
Inflation reared its ugly head; the punch bowl is now empty, and the hangover is upon us.
The Fed has lost credibility as has the political class trying to manage this economy. Inflation hurts the middle and lower-end earners the most. It acts as a tax on purchasing power. Food prices plus rents have gone through the roof!
We are expecting more moderate policies to soon prevail as the public suffers and wakes to the reality of a diminished standard of living, slower growth, and fewer opportunities. November elections may change sentiment and restore some balance, which investors traditionally prefer.
After a dreadful market month like September, and three down quarters in a row it is good to remember that when the froth has washed ashore, gems surface.
The upside from here to the old S&P 500 all-time high is over 30%. No doubt we will get back to those levels one day. Sell into euphoria, buy into panic has worked over the long run.
Despite global gloom, October often provides relief as investors look to the turn of the year with optimism. A meaningful reduction in inflation or deteriorating economic reports over the next three months may convince the Fed that tightening into a slowing economy is treacherous. We shall see with new reports on CPI and GDP due shortly.
Further downside is also a possibility. Valuations are near historic norms for earnings, given the recent pullback. However, valuations are based on 2023 earnings expectations, which are likely to come down as Q3 numbers come to light.
Perhaps more glaring is Mr. Powell 's commitment to increasing rates given the priority of vanquishing inflation before it becomes imbedded in fragile investor and consumer psyches.
Fed tightening at the current steep rate stokes fear of something breaking in the system. We would not be surprised if a financial calamity arrives soon.
We are staying alert for opportunities as they surface, while continuing to manage downside risk.
As always, we are available for conversations regarding your investments, your goals and your concerns.
Doug Coppola - Executive Director & Investment Committee Chairman
Steve Lindgren - Chief Investment Officer & Partner