THE SHORT STORY
After a brief bear market rally early in the quarter, markets remained volatile thanks to continued focus on inflation and the Federal Reserve’s ongoing interest rate hikes. In fact, outside of cash, almost all asset classes produced negative returns during the quarter.
Looking forward, while inflation will likely continue to trend downwards, it remains very unclear how long/high the Fed will have to hike rates to bring inflation all the way down to its 2% target. What is clear is the Fed’s message that it will remain steadfast in its stated goal to hike interest rates until inflation has moderated sufficiently. The more the Fed hikes interest rates in pursuit of this goal, the closer we get to the end of the rate hike cycle – and the more concerned markets become that the Fed will hike us into a recession. Any indication that the Fed will slow or stop hiking rates (such as Fed commentary, weaker than expected inflation or economic data, etc.) would be viewed very positively by markets.
While a recession may be likely, we would expect it to be mild thanks to a currently very resilient US economy. Bear markets and talk of recessions are very gloomy. However, we know from history that times like this tend to create the best go-forward returns. This reminds us that during times of fear, it is critically important to remain invested and not miss the recovery.
Where We’ve Been – 2022 Q3 Review
The third quarter began with a strong bear market rally, with the S&P 500 rallying almost 14% from July 1 through mid-August. The rally was driven by a very misinformed (and overly optimistic) belief by markets that the Federal Reserve (the “Fed”) might start to slow the pace, and reduce the size, of interest rate hikes. This belief gained momentum through the first half of the quarter despite higher inflation reports than expected, another 75 basis point Fed rate hike AND repeated and explicit commentary from Fed that the central bank would continue to hike rates diligently to bring down inflation. The bear market rally came to an end at the annual Jackson Hole Economic Symposium in August, where the Fed was very intentional in communicating to markets their intention of hiking rates until inflation was well under control. After digesting this information – and another surprise inflation print in early September – markets fell to where they began the quarter.
Outside of this transitory bear market rally, not much changed in markets during the third quarter: volatility persisted thanks to continued concern around inflation and ever-changing expectations of future Fed rate hikes (designed to bring inflation down). Within this dynamic, good is bad news, and vice versa. Good economic news (an indicator of more rate hikes being needed to cool the economy) continued to drive mostly down days in markets while bad economic news (an indicator that the Fed might be closer to the end of its rate hike cycle) generally resulted in up days.
Third quarter and year-to-date returns, as shown below, are once again all negative outside of the US Dollar, which has been on a tear thanks to the strength of the US economy allowing the Federal Reserve to raise rates faster than other central banks around the world. The strong dollar has disproportionately hurt international returns.
|Market Category||Market Index||Q3 2022||YTD 2022|
|US Large Cap||S&P 500||-4.9%||-23.9%|
|US Small Cap||Russell 2000||-2.5%||-25.9%|
|International Developed||MSCI EAFE||-9.3%||-26.8%|
|Emerging Markets||MSCI Emerging Markets||-11.6%||-27.2%|
|US Bonds||BB US Aggregate||-4.8%||-14.6%|
Where We’re Going – 2022 Q4 Outlook
Inflation and the Federal Reserve will continue to be top of mind for investors, although it appears likely that we are closer to the end of this inflationary dynamic roiling markets than we are the beginning. Not only is inflation moving down (albeit slowly), but the economy is showing signs of slowing (rising inventories, weaker housing data, etc). A continuation of either or both of these trends will be received positively by markets, as both point to the Fed slowing or stopping rate hikes sooner (the latter due to the belief that the Fed will NOT allow rate hikes to cause an economic recession).
Globally, greater inflationary issues and weaker economic backdrops point to meaningful recessions in many global economies – especially in Europe. Combining these recessionary concerns with heightened geopolitical tensions (Russia, China, etc), we believe that caution is warranted internationally. That said, there an increasing number of compelling opportunities in these markets that will be ripe for investment at some point (the question is “when?”).
Going forward, we believe that the Fed will, in fact, diligently hike rates to ensure that inflation continues to trend down towards their 2% target – even if this causes the economy to enter a recession. Thanks to a strong labor market, resilient consumer spending, and healthy corporate balance sheets, we expect any potential recession to be mild compared to those that will be experienced by international economies. We are mindful of the fact that the market tends to bottom 6 months before an economy in recession bottoms.
Additionally, we believe that third quarter corporate earnings reports – being announced throughout October – will be positive but ultimately disappoint markets (thanks to headwinds from a strong dollar, inflationary issues, shrinking margins, waning demand, etc). This will drive further downside volatility in the short term and (we believe) will lead to an environment where stocks are more fair valued and ultimately create conditions necessary for the market to bottom and begin its recovery.
As we mentioned last quarter, while we cannot predict when the market will bottom (studies indicate attempting this is futile), there is a case to be made that future returns will be strong.
- Valuations have moderated substantially, improving go forward return expectations
- Historically, large drawdowns are followed by periods of strong returns
- Consumer Sentiment, a contrarian indicator, is near a 40-year low
- The market has been positive almost always 12 months after mid-term elections
- The market tends to have returns close to 10% 12 months after inflation has peaked
We want to emphasize, like last quarter, that our main conviction is that market exposure today should be rewarded over the next 1-2 years – NOT that today is the day to re-enter the market (timing is impossible to know). Because of the remaining uncertainty, we remain focused on attaining market exposure through allocations in more defensive areas of the market that will be more resilient through remaining volatility while still offering very attractive upside potential when the bear market eventually ends.
Thank you for allowing us to partner with you as we navigate the ever-changing market. We appreciate your continued trust.
If you have questions or would like to dive deeper into this quarter’s outlook, please reach out to our investment team. We’d be happy to set up a virtual coffee to talk more.
Investment advisory services offered through Thrivent Advisor Network, LLC., a registered investment adviser and a subsidiary of Thrivent. Advisory Persons of Thrivent provide advisory services under a “doing business as” name or may have their own legal business entities. However, advisory services are engaged exclusively through Thrivent Advisor Network, LLC, a registered investment adviser. Parable Wealth Partners and Thrivent Advisor Network, LLC are not affiliated companies. Information in this message is for the intended recipient[s] only. Please visit our website parablewealth.com for important disclosures.
Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.
Asset allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Performance of the asset allocation strategies depends on the underlying investments.
This website is intended to provide general information about Parable Wealth Partners and its services. It is not intended to offer or deliver investment advice in any way. Information regarding investment services are provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information.
Market data, articles and other content on this website are based on generally available information and are believed to be reliable. We do not guarantee the accuracy of the information contained in this website. The information is of a general nature and should not be construed as investment advice. Please remember that it remains your responsibility to advise Parable Wealth Partners, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.
We will provide all prospective clients with a copy of our current Form ADV, Part 2A (“Disclosure Brochure”) and the Brochure Supplement for each advisory person supporting a particular client. You may obtain a copy of these disclosures on the SEC website at http://adviserinfo.sec.gov or you may Contact us at email@example.com to request a free copy via .pdf or hardcopy.
This material is provided for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The views and strategies described may not be suitable for all investors. They also do not include all fees or expenses that may be incurred by investing in specific products. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. You cannot invest directly in an index. The opinions expressed are subject to change as subsequent conditions vary. Advisory services offered through Thrivent Advisor Network, LLC.
This communication may include forward looking statements. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “seeks,” “could’” or the negative of such terms or other variations on such terms or comparable terminology. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to differ materially.
Index Benchmarks presented within this report may not reflect factors relevant for your portfolio or your unique risks, goals or investment objectives. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index.
The Bloomberg U.S. Aggregate Bond® Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the U.S. bond market.
The MSCI EAFE® Index is a broad market index of stocks located within countries in Europe, Australasia, and the Middle East.
The MSCI Emerging Markets® Index is a selection of stocks that is designed to track the financial performance of key companies in fast-growing nations.
The Russell 2000® Index measures the performance of the 2,000 smaller companies that are included in the Russell 3000® Index, which itself is made up of nearly all U.S. stocks. The Russell 2000® is widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies that focus on the U.S. market.
The S&P 500® Index, or the Standard & Poor’s 500® Index, is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.
The U.S. Dollar Index – known as USDX, DXY, DX and USD Index – is a measure of the value of the United States Dollar (USD) against a weighted basket of currencies used by U.S. trade partners. The index will rise if the Dollar strengthens against these currencies and fall if it weakens.