Quarterly Commentary, Q3 2022

The Federal Reserve was front and center for the third quarter of 2022. Stock traders hung on every word Jerome Powell spoke as the Chairman of the Federal Reserve announced rate increases of 0.75% in both July and September, pledging to continue raising rates until inflation was under control—meaning at or near their target of 2%.

The Fed has two objectives, known as their “dual mandate”: control inflation and maintain full employment. In the August meeting, Powell said there would be pain coming, suggesting rates will continue rising, even if it means a rise in unemployment. Each time the Fed raised rates, hinted at future rate increases, or estimated when the increases may end, traders used that information to guess how that may affect certain stocks. Stock prices adjust when new information becomes available.

According to the U.S. Aggregate Bond Index, which started tracking the U.S. bond market in 1976, 2022 has been the worst year on record for bonds. Over the last 12 months, the U.S. Aggregate Bond Index fell 14.61% while the World Government Bond Index fell 3.71%. As interest rates rise, bond prices fall, and bonds with longer maturities are hurt more than bonds with shorter maturities.  

This is also the first year since 1976 that U.S. stocks and bonds have both fallen in three consecutive quarters. Interest rates are just one of the many variables affecting stocks. Investors are also speculating about the upcoming midterm elections and what the outcome might mean for their portfolios. Predicting election results is not a wise investment strategy, but that doesn’t mean there aren’t investors who will try. Fighting inflation will also be a political topic as we head toward the elections. Countries worldwide face their own inflationary issues even as Covid-19 guidelines wind down. Europe has been dealing with its own recession fears as the energy crisis and conflict with Russia continues. Much like picking stocks, it is impossible to tell which countries will emerge from economic hardship and when.

The S&P 500 is down 23.87% year to date, making this the fourth worst start to a year in history. Bear markets, defined as a 20% decline, occur roughly once every six years for the S&P 500. While the pain of a down market hurts each time, putting these types of markets into context can help. Not only are these downturns normal, but they are also expected (although not predictable).  

Investors have become more and more uneasy as 2022 has dragged on. Is the U.S. headed for a recession? Are we already in one? What will happen with the midterm elections? How long until things start to look better? Will things get worse? Think back to March 2020, when the stock market fell 34% in four weeks. Many people felt the Covid-19 pandemic would keep the stock market and the economy hurting for months, if not years. But, by August 2020, the S&P 500 had recovered its losses, long before anyone expected and long before the recovery “made sense”.

Had we known what was to come, we all could have maintained our composure and bought stocks while they were at their lowest point, when things looked the worst. In hindsight, every downturn seems like an opportunity, but things feel bleak when you’re in the middle of a downturn. One thing that should give every investor hope is that the world’s most significant innovations often come as a response to problems. Problems spark change in the world, whether a product, idea, or policy. We do not know how or when these innovations will appear, but they do, and the stock market charges on in the face of every reason pessimists think it shouldn’t. Investing for the long term requires optimism.

Benchmark Returns for the Period Ended September 2022