The third quarter of 2022 is about to wrap up, unfolding much like the first half of 2022. This has been a volatile year consisting of losses in international stock and bond markets. Adding fuel to the fire, there have been no shortage of headlines from the financial media, some designed to create fear and confusion. There are many reasons why markets have been challenged thus far in 2022, with rising interest rates to combat inflation and the Russian invasion of Ukraine topping the list. It is very important to remember we have been here before. Geopolitical risks are consistent and ever present in financial markets. And, most recently in 2013, the Federal Reserve was raising interest rates and removing accommodation at a fast pace much like today. Going even further back, some may even remember getting a mortgage with a rate of 10-13%, with high interest rates required to bring down inflation during the 1970s. A common thread is that participants in financial markets have been rewarded with returns over the long term by being patient. While it is natural to want to take action given all the changes in the world, the best strategy is to remain invested using a disciplined plan.
We wanted to share a couple of reasons for optimism below:
- The U.S. economy is in a good position to weather any potential slowdown in global growth—from whatever source it may come from. Corporate and consumer balance sheets are in good shape by most measures—neither sector appears to be over-extended.
- Earnings for companies in the S&P 500 are actually growing. While there are winners and losers in the economy as we are adjusting to a new normal post COVID, on balance, corporate earnings have held up well.
- Fixed Income markets have hit the reset button and by most measures, high quality bonds are as cheap as they have been at any point since 2007. An unfortunate feature of investing in 2022 is the fact that bonds were unable to buffer losses from stocks. Going forward, while it is possible that bond investors still have some volatility in the short-term, high-quality bonds are now yielding between 4-6% and investors should expect mid-single digit returns from high quality bonds in the medium term.
- We may be close to returning to the mantra “bad news is good news” that dominated financial markets in the period following the financial crisis of 2008. Any economic data that suggests the U.S. economy is entering a recessionary period could give the Federal Reserve the ability to end their rising rate program. So, while it is very possible that the U.S. economy is in or nearing recession, it may not be the worst news for investors.
- Inflation is high, but the rate of increases has slowed significantly this summer. Any signs that inflation is moving from its current year over year rate of 8% towards 2% will be met with relief from market participants.
Patience pays off for both stock and bond investors. The link below contains a slide showing that balanced portfolios consistently have positive returns over five- and ten-year time periods. The last ten years have been good for investors even through today. We expect the next ten to be the same.