2022 Q4 Investment Update
The FED Moves Forward by Looking Backward
The FED’s stated mission is to ensure price stability and full employment, which explains the heavy focus on inflation and unemployment data. Unfortunately, both of those series represent lagging indicators that only see the impacts of monetary policy after delays that are long and variable. In times like this, when inflation is running uncomfortably high, the FED almost has no choice but to tighten policy aggressively, despite the risks ahead, to bring that inflation lower and back into alignment with FED policy. This increases the likelihood of too much tightening and a recession, which now seems inevitable.
The expected vast changes in financial conditions due to an aggressive FED have yet to fully materialize in macroeconomic data. Still, we believe those impacts are coming and will be significant. The much hoped-for “soft landing” seems increasingly unlikely as the prospects of recession are high and rising. Inflation should start to trend lower in such an environment, but it may not be at the speed the FED desires. Despite these challenges, corporate and consumer balance sheets are fairly healthy, which should help to buffer the worst impacts of any potential recession, making the downturn shallower and less severe than was the case in 2009.
We don’t know what the markets will do over the next 12 months. But we know recessionary environments don’t last forever, and this too shall pass. This year has been considerably tough to stomach because every month, as you open your statement, the broad markets (and accounts) have continued to lose value. We are now heading into month 11 of a negative market since the S&P 500 peaked in December of 2021. Since 1931, bonds have only lost money in four consecutive quarters once (1954) and three consecutive quarters three times (1931, 1980, 2022). Stocks have lost money in six consecutive quarters twice (1969-1970, 2008-2009), five quarters once (1931), and four quarters twice (1937-1938, 1974-1975)1.
*Source: BlackRock Student of the Month – October 2022
We remain diversified investors and make portfolio adjustments if and when necessary. Increased volatility across broad markets, particularly in the historically stable fixed-income market, has lead to an active trading year. It has allowed us to tax-loss harvest in taxable accounts and move out of certain legacy positions that possibly carried a (previous) large tax liability.
Because markets are forward-looking, we wanted to take a look at previous instances of peak inflation and how markets performed in the following 12 months. The chart below shows various time periods going back to 1926, when inflation peaked. While past performance is not indicative of future results, the next 12 months for stocks and bonds were both positive, with stocks averaging +21.3% and bonds +7.0%. This speaks to why during times like these, successful long-term investors need to keep their faith, have patience, and maintain their discipline.
If you would like to discuss your long-term financial plan in greater detail or would value a review of your current investments, please contact our office to schedule time with one of our Wealth Advisors. If you are not currently a client and value a second opinion, we are here to help. Now is a better time than ever to look at your current investments and financial plan to make sure they are properly positioned for the unexpected. https://vancewealth.com/book-an-appointment/
Regards, Jerrod Ferguson, CFP® Vice President
*Source: BlackRock Student of the Month – October 2022
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Disclosures: The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forwardlooking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Past performance does not guarantee future results. The information provided is for educational and illustrative purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Vance Wealth, Inc. (“Vance Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Vance Wealth and its representatives are properly licensed or exempt from licensure. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index.
