Q3 Market and Economic Update

Steven Bouchey

What a summer we enjoyed and here we are with foliage showing brilliant colors before the leaves start to fall, no pun intended. Before we know it, Thanksgiving will be here, and then the holiday season. Have you had your fill of pumpkin spice this and that yet?

This is supposed to be our quarterly state of the economy letter but after yesterday’s hotter than expected CPI report, let me get right to the matter at hand and that’s inflation. Many were hopeful that we’d see a more favorable reading yesterday being that so many parts of the economy are softening, but that’s not the case. Inflation peaked in June at an annual rate of 9.1% and has trended down over the summer, so we were expecting 8.1% for September and not the 8.2% reported.

As I say often, inflation is a moving target and reports like CPI are lagging gauges reporting what has already happened, kind of like looking out the rear-view mirror while driving, whereas the stock market is looking ahead. The Fed has yelled from the mountaintops that they will be aggressive with hiking interest rates until they get inflation under control and yesterday will confirm their conviction that higher rates are here to stay for now and more than likely we will see another 0.75% hike at their next meeting.  But, BUT, this can change at any time when we see inflation falling more than it has.

Are we in a recession? This is the unknown question. Two consecutive quarters of negative GDP growth are typically used as a shorthand definition for a recession, and we had that in the first and second quarter 2022, third quarter will be released on Oct 27. The National Bureau of Economic Research (NBER), the entity responsible for declaring recessions, uses several factors to determine when there is a recession, and we don’t know when they will let us know if we are or aren’t in one.

No one knows when the U.S. will enter a recession again. The good news about being in one is on average stocks over the past 69 years did worse the year before a recession began than during the recession itself. Stocks usually bottom six months before the economy but have bottomed as much as ten months before the economic decline is over. Because the stock market is forward-thinking, unlike reports on the economy looking at data that has come and gone, this market can turn around well before we realize that we are in a recession and stocks will go on to make new all-time highs again.

This time is not different than every other market correction or bear market. With headlines like Covid, supply chain issues, and the Russia-Ukraine war, it seems different, but it’s not. The third quarter was off with the S&P 500 losing -3.8%, and as I write this letter to you down about 24% YTD. Bonds are down -15%.

Another reason this time feels different is that both stocks and bonds have fallen and there was nowhere to hide. A typical 60/40 portfolio that usually protects stock investors by having bonds to lessen the fall failed investors until now.  For the first time in a long time, I am giddy over bonds with yields for Treasury-Bills and Treasury-Notes yielding between almost 4% to 4 ½ % while investment grade corporate bonds even more.

Believe it or not, this is a buying opportunity for both stocks and bonds. I’m not saying that the volatility is over but it’s not often that long-term investors can buy stocks selling at a 25% discount and bonds 15%. We sold out of bonds last fall and started buying back in a few weeks ago taking advantage of prices being down. Bond prices and yields have an inverse relationship; when yields go up the prices go down.

Over the past 15 years, taking into account the Great Recession and financial crisis of 2007-2009 where the S&P 500 Index was down -50%, Covid-19 2 ½ years ago where the S&P was down -34% and now in 2022 with the S&P down 24%, when you look at the average annual returns year-in and year-out for the major indexes, they prove that over time stocks especially do well. Since 2007 the S&P was up on average almost 8%, Nasdaq 13%, international stocks (which we sold out of years ago) as measured by EAFA only 0.50% and bonds 3%.

Ryan Bouchey, CFP®, CPA, our Chief Strategy Officer, has written this quarter's market forecast which is attached.

For anyone taking social security, it was announced that you will receive an 8.7% raise, that is the best news of the day.


Stay healthy and be well,


Download the Q3 Quarterly Market Report

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