The start of the third quarter was surprisingly strong for the stock markets. A rally took hold throughout July and the first half of August, gaining back nearly half of the year-to-date decline before being spooked by higher-than-expected inflation figures mid-month. An increasingly aggressive Fed tone followed and drove stocks back down into bear market territory as of the end of September. At the close of the quarter, the S&P500 is at its low-point for the year, down 23.87% from the peak at the end of 2021.
Fixed income markets once again tracked closely with equities last quarter. Interest rates declined in July before beginning a steady rise throughout all of August and September, bringing fixed income yields to levels not seen in more than a decade. In the short term, this has been uniquely painful for bonds, as current holders have seen their prices adjust down in response to higher rates. It is not all bad news, however – the higher rates offer much better returns for savers, who can finally get a decent risk-free return. Individual bond holder will see their values move back towards par over time and those holding through mutual funds and ETFs will benefit as the underlying bond portfolios incorporate new higher yielding offerings.
While there are many factors driving the declines this year, the primary one remains Federal Reserve (Fed) action. In our last Newsletter, we talked about how interest rates affect stock valuations. At the time, forecasts for future rate increases had seemed to stabilize, leading to the July rally. Mid-quarter, the Fed revised its eventual target to a higher peak rate for 2023 and left the door open to even larger rate hikes. This action sparked the renewed downturn and, until the inflation picture becomes more certain, we can expect continued market turbulence.
The Fed is in the middle of a painful policy change. Because financial markets are forward looking and always seek to incorporate all known information, they are the first to feel the impact. Similarly, the market has historically begun its recovery out of bear markets ahead of changes in news and sentiment. While the headlines and numbers are certainly troubling right now, the Fed’s actions should ultimately lead to a healthier economy and stronger future growth. For those putting money aside, a bear market offers a chance to buy stocks at lower prices than have been available in years, potentially leading to higher future returns when the market recovers. Other steps, such as rebalancing allocations within accounts, can provide similar benefits over the course of a full market cycle.
Finally, with the upcoming mid-term election bringing politics to the forefront, it is interesting to note that, historically, the second year of a Presidential cycle is the worst for the stock market, while the third year has been the best (by a significant margin). We’ll see if that holds true once again.
As always, please let us know of any questions or concerns.
The PWM Team
Welcome to Adam
We’re excited to welcome Adam Kunkel to our team. Adam comes to us with five years of industry experience and will be initially working in an analyst role, assisting with investment research, portfolio management, and crafting financial plans.
Social Security Increase
The “cost of living adjustment” to Social Security benefits is calculated each year based on the change in prices in the 12 months leading up to the end of 3rd calendar quarter. The change is applied to payments at the start of the next year. In 2022, the increase was +5.9%, the largest increase since 1982. It is estimated that the increase for 2023 will be higher.
