Q3 Market Commentary
The 3rd quarter of 2022 started out strong, with the S&P 500 Index climbing almost 15% from the end of June to the middle of August. Then, the Federal Reserve indicated they might have to be more aggressive with interest rates to respond to the rising inflation numbers. The markets around the globe took this as bad news and promptly gave up all the growth that had occurred during the previous 45 days to end up lower than it did on June 30th. Market forecasters are increasingly projecting a recession, as the more the Federal Reserve increases rates, the harder it might be to have a soft landing with the economy in general. A soft landing occurs when interest rates rise just the right amount to slow the Gross Domestic Product (GDP) down, but not cause it to go negative. A recession is defined as two consecutive quarters of negative GDP growth. The Federal Government and the Federal Reserve Bank do not seem to be on the same page in combating the inflation problem, with the government continuing to stimulate the economy through the “Inflation Reduction Act” and other actions like forgiving student loan debts. Government spending will continue to exacerbate an already overheated economy, essentially forcing even higher interest rates. This is happening abroad as well, with the United Kingdom proposing tax cuts at the same time their central bank is raising rates.
For the quarter, large U.S. companies represented by the S&P 500 Index lost 4.88%, down 23.8% for the year. Small companies represented by the Russell 2000 lost 2.19% for the quarter and are down 25.1% for the year. International stocks represented by the iShares MSCI EAFE Index lost 9.36% for the quarter, and are down 27.09% for the year.
With the Federal Reserve raising the Federal Funds Rate, bond yields have increased as well. When bond yields go up, the price of the bond goes down. An investor purchasing bonds will now have a much more attractive yield on their bonds than they did just a few short months ago. Investors who own bonds have seen the sharpest decline in bond prices since the 1980s. The Barclays US Gov/Credit 1-5 Year Bond Index lost 2.16% for the quarter, and is down 6.62% for the year.
Our team has been working diligently to rebalance portfolios, sell declining investments for tax loss harvesting purposes, and doing ROTH IRA conversions to take advantage of declining values. We believe portfolios are still well suited for the long-term and recommend staying the course during turbulent times.
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Petersen Hastings