It has been a particularly ugly year in financial markets. It is extremely rare to see stocks and bonds experience this kind of reset. Typically, when stocks struggle, bonds perform well and vice versa; not the case this year. Market pullbacks are a part of being an investor. Unfortunately, pullbacks lead investors to sell when times are tough and pile on when things are good. This almost always results in poor results for investors. As Warren Buffet likes to say, “Be greedy when others are fearful and fearful when others are greedy.”
However, as we look forward, things appear much brighter. Stock valuations are now more attractive, and bonds are offering stronger yields. This means market risk has decreased considerably compared to the beginning of the year. This typically happens after a downturn in the market. If you look at the chart below, you’ll see that historically the market is up 20% one year after a recession and 50% three years after a recession.
The biggest concern remains to be inflation. The current inflationary environment was thought to be "transitory" but has proven to be far stickier than most predicted. We believe recent inflation results from "too many dollars" chasing "too few goods." The unprecedented stimulus to jump-start the economy following COVID increased the money supply by roughly 40% creating "too many dollars." COVID shutdowns, the Great Resignation, and war in Eastern Europe created "too few goods." The good news is we've seen consumer goods inflation slow. However, service inflation remains strong as consumers transition spending to eating out and long overdue vacations.
The Federal Reserve is acting to fight inflation by raising interest rates to slow the economy. We will be watching closely to see if the FED can slow the economy without pushing us into a recession. Historically they haven't been very successful at this. History doesn't often repeat, but it does rhyme
Inside client accounts, we've made changes to adapt to the new market environment. We have increased the quality of our stock and bond portfolios. We have also added alternative strategies to create more diversification, hedge against inflation, and increase income. Our goal is to manage risk and return to meet our clients’ goals and objectives.
One of the greatest outcomes of recessionary times is that critical thinking improves, weaker businesses fail, and American ingenuity prevails. We are at a precise time in history when these things are happening, and new technologies are being created that will fuel the next bull market. This is innovation merging with capitalism—and it is alive and well.
Please reach out to us if you have any questions. We want you to know we are here, we are aware, and we care.