Fall 2022 Newsletter

The bear market, after a brief rally from June 16-August 16, resumed its downward trajectory.

ECONOMY

The economy is in a precarious situation. The inflation the Federal Reserve is so worried about (and which has hit Mr. and Mrs. Joe Sixpack very hard) has likely peaked and will start to come down fairly rapidly in early 2023. The Fed has already likely overplayed its hand, and there is a good chance they wreck the economy, as they have raised interest rates at the quickest pace in modern history. With Leading Economic Indicators declining for the past six months (which has always indicated recession) and a yield curve that has been inverted by as much as 53 basis points in September (an indicator that has preceded every recession and is more inverted than at any time since before 2000), the odds we end up in a serious recession in early 2023 or so is probably a foregone conclusion. The demand destruction/unemployment that will accompany this will be made worse by the Fed’s actions as they have about a nine-month lag. In other words, the 75 basis point increase in rates in September won’t be fully felt until June, and by then, we will likely be deep in a recession, making it worse. Any future rate drops will similarly have a time lag. The bottom line is buckle up, buttercup. This won’t be fun, but hopefully, it won’t be deep and long-lasting. The good news is that we don’t have all the systemic issues that led to the 2007 housing and financial crisis. The bad news is that we don’t yet know if the Fed’s actions will lead to some sort of crisis. Hopefully not.

MARKETS

This is an ugly year. Stocks are down over 20%; bonds are down over 10%, and even gold is down about 10%. The only bull market has been in CDs, as their yields have risen in conjunction with short-term rates. Stocks sold off hard after the mid-June to mid-August rally, confirming we are in a classic bear market. We are likely entering the final third phase of it, but losses could still be another 20% or more down from the end of September. Stock prices have fully priced inflation into their prices, but not reduced earnings from a recession. This is what will likely lead the next leg down. So far this year, the biggest disappointment for investors is that their “safer” money in bonds has been hit hard as the Fed rocketed rates faster than expected. However, as the fears of inflation cede to fears of recession over the next few months, it is likely bonds—especially Treasuries—will resume their safe haven status. Bonds are now yielding rates that have historically been great for investors, and their price dislocation points to capital gain opportunities as well.

FIRM

As our firm wraps up its 25th year, we have had our first retirement with Rhonda retiring at the end of September. In addition, Leslie joined Lee in being part of the firm for over 20 years, and Matt left his 30s behind, hitting the big 40. As the economy, markets, investments, laws, regulations, and many other things change, we continue to re-evaluate how best to serve our clients. I am a big believer in kaizen—continuous improvement—and am always on the lookout for how best to serve you—our valued clients. You are the reason we come to work every day. We know times are hard right now, but we also know that tough people last; tough times don’t. We will do what is necessary to continue to help you reach your financial goals to the best of our ability.

Thank you for your continued trust.

The opinions in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. All performance referenced is historical and is no guarantee of future results