Stephen A. Jordan, CFP ®

Christina J. Pitcher

              2405 W. Cornerstone Ct.

Peoria, IL 61614

309.691.1616

www.cyrwoertz.com

Market Update
(all values as of 11.30.2022)

Stock Indices:

Dow Jones 34,589
S&P 500 4,080
Nasdaq 11,468

Bond Sector Yields:

2 Yr Treasury 4.38%
10 Yr Treasury 3.68%
10 Yr Municipal 2.75%
High Yield 8.46%

YTD Market Returns:

Dow Jones -4.81%
S&P 500 -14.39%
Nasdaq -26.70%
MSCI-EAFE -16.78%
MSCI-Europe -17.23%
MSCI-Pacific -15.76%
MSCI-Emg Mkt -21.08%
 
US Agg Bond -12.62%
US Corp Bond -15.39%
US Gov’t Bond -13.16%

Commodity Prices:

Gold 1,784
Silver 22.48
Oil (WTI) 80.52

Currencies:

Dollar / Euro 1.03
Dollar / Pound 1.19
Yen / Dollar 138.48
Canadian /Dollar 0.74

In 2022, we have been reminded of what the “risk” portion of investing in public companies really means-that occasionally we will have to deal with a rather significant, likely temporary drop in their aggregate value. As financial planners, managing portfolio and retirement risk is one of the core components to developing investment policy, but seeing a hypothetical 25% portfolio drawdown on a computer screen and living it are two very different emotional experiences. For the bulk of the last decade, the “risk” of investing in diversified portfolios has been largely absent. Sure, there was the Covid panic of 2020, when the S&P 500 dropped 35% in a month. There was 2018, when the market fell 20% over the holiday season in response to…something…tariffs, interest rates, Trump’s twitter account? We had to endure 2015 where the market was only positive by 1.38% and 2018 where it was down 5% *gasp*. Throughout all the corrections we have experienced going back to the great recession, one thing has been consistent—the pain has been short lasting and the recoveries have been fast.

The 2018 correction started in September and equities fully recovered in April. By the time investors received their 2018 year-end statements, stock prices were already rapidly improving. And Covid? Surely there would be long lasting pain for investors when the world endures a once in a hundred-year pandemic where the economy is turned off overnight and unemployment reaches its highest level EVER. Instead, when the markets began to fall in mid-February 2020, the pain stopped just 37 days later. By the time March investment statements were opened, the market was already ten days into a sharp recovery from the lows. Not even six months later and markets were approaching new highs.

We have been fortunate as investors. Fortunate to have an equity market that has gone up every year except one since 2009. Fortunate for a bond market that enjoyed decades of falling interest rates. Fortunate for easy monetary policy and low interest rates. Fortunate to have historically low inflation, that for the better part of the last decade the Federal Reserve couldn’t get to crack 2% as one of their primary mandates. I digress.

Assuming we are either in a recession or will soon be in one, something not even the smartest economists and PhDs can agree on, it will be our ninth recession since 1970. Each of these recessions were different. Different in their cause, their duration, and their recovery. The 2008 financial crisis recession was the longest at 18 months, while the Covid recession was the deepest and shortest lasting. The early 2000’s recession was a combination of the tech bust, 9/11 and the Enron/WorldCom collapses which caused three consecutive years of negative stock market returns.  There is no shortage of people who spend their time predicting economic downturns, and they often have a newsletter subscription for sale that is sure to be the crystal ball that tells you what to do.

Because we are not in the business of timing the market or selling newsletters, I will remind you of a few things we do know about the previous fifty years of recessions.

The S&P 500 had a value of 92 in 1969. After absorbing the most recent 25% drop in prices, the S&P 500 is at around 3,600. It has gone up 39 times over the last 50 years.

The dividends, or income, of the S&P 500 was a little over $3 in 1969. The 2022 dividend estimate is over $60. The income that we get from owning shares in the companies that make up the S&P 500 has gone up 20 times over the last 50 years.

 

 

Inflation, the silent killer of cash, has caused the price of something that cost $1 in 1969 to now cost around $8. Our cost-of-living has gone up 8 times over the last 50 years and that is with a decade of below trend inflation.

To recap: Over the last 50 years, through 9 different times of extreme crisis, our cost of living is up 8 times, the equity market’s dividend income is up 20 times, and the aggregate value of these great companies is up 39 times. If you are searching for something to maintain your increasing cost of living, while also potentially adding tremendous value to you and your heirs on top of it, I can’t think of a better way than US stocks. And they are now on sale.

The third quarter included more of the same for the markets and economy. More persistent inflation. More interest rate hikes from the Fed. More conflict in Ukraine. Markets rallied nearly 14% to start the quarter with hopes that the Federal Reserves’ predictions were correct, that inflation was about to moderate and rate hikes would slow. Reality would prove otherwise as persistent inflation and continued strength in the jobs market indicated that there is still a lot of progress to be made. The Fed has now raised rates 75 basis points three times in a row, and more worrisome for the markets has been the expectation for the terminal interest rate has moved higher. Markets are now pricing in an additional 125 basis points of rate hikes in the final two meetings of the year (November and December) and another 25 basis points in 2023. The Fed’s talk has toughened as well, with Fed Chair Powell indicating that to get inflation under control it will require growth to slow, jobs to be lost and some pain for the economy and investors.

Entering the fourth quarter, the markets and the economy are still facing numerous challenges from continued high inflation, Fed rate hikes and geopolitical instability. While these obstacles present challenges, the market decline we have endured is certainly pricing in a lot of the bad news. Stock market valuations are now below their 25-year average and pessimism is near all-time highs, which has historically led to higher long term investment returns for patient investors. For a true bottom to form and turnaround to begin, a few things need to materialize over the next few quarters.

First is inflation. While it looks to have peaked, inflation remains well above the Fed’s target of 2%. This has been the biggest obstacle for the markets over the last 12 months, but is something that can’t last forever, especially with the Fed’s commitment to lowering it. Any material deceleration in the monthly CPI numbers should act as a catalyst for stock and bond prices.

Second, when we do start to see a moderation in inflation, this will trigger a less aggressive Federal Reserve and interest rate hikes will begin to slow, and eventually stop. Currently, expectations are that this rate hike cycle will end in the first quarter of 2023, although I wouldn’t put too much faith in these estimates. When a Fed pivot does happen, it will likely spark a considerable rally in equity prices as long as the economy and corporate earnings haven’t deteriorated significantly.

Third, there has been little progress in Ukraine and recently things have escalated. Risk of broader conflict is still there, but Russia has been losing support from allies such as China and India. Like any geopolitical conflict, it causes great uncertainty and the markets hate uncertainty. Any meaningful progress in Ukraine would go a long way to calm both stock and bond markets.

The bottom line is that the market is going to be in this downward/sideways trend as long as we are in the midst of an aggressive rate hike cycle. Predicting when the Fed will pivot is a month to month guessing game, but with investor sentiment this negative and markets down as much as they are, it likely isn’t going to take significant good news to spark a sustainable rally. While a true turnaround isn’t likely to happen in the very near term, it may not be that far away, either.

This has been one of the most difficult markets we have had to endure in quite some time, and we are not out of the woods yet. Despite these challenges, positive surprises often occur when things seem like they will only get worse and eventually markets recoup losses and move to new highs. Successful investing is a marathon and even extended periods of market turbulence are unlikely to derail a well thought out financial and investment plan. It is critical to remain invested and patient.

Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.