The third quarter proved to be difficult for the market and portfolios, relinquishing all of the market gains made in July and August during the last 5-6 weeks of the quarter. All the major stock indices, along with the broad bond market, closed out the quarter slightly lower than the end of June. Historically during these periods of volatility, we have relied on bonds to reduce the downside of the stock market. While most of the bonds have accomplished this, they have also suffered losses due to the Fed raising interest rates so aggressively. So, what is causing so much volatility in the markets this year? We believe it is the uncertainty around:

• • Inflation,
  • the resulting rate hikes by the Fed,
  • the conflict between the Ukraine and Russia, and
  • the upcoming mid-term election.

Of these four causes, we believe inflation (and the resulting interest rate increases) are currently what is weighing heaviest on the markets. Because inflation numbers came in slightly higher than the market expected in September, the Fed raised its baseline interest rate by another 0.75%, and the belief is that it will follow up with an additional 1% increase by the end of the year – likely in November and/or December. Note these expected rate increases are now 1% higher than what was anticipated even a short 3 months ago, which has contributed to the volatility in both the stock and bond markets. We hope that by the end of 2022 we will begin having some clarity on at least one or two of these uncertainties and that the volatility of the stock (and bond) market can therefore be reduced going forward.

The “R” word
Recession is at the top of many people’s minds and evokes concern, especially if you are remembering what we experienced in 2020 (the Pandemic recession – a 10.1% loss in gross domestic product (GDP)) or 2008 (the Financial Crisis – a 4.0% loss in GDP). These were the largest recessions since World War II but remember there have been many other recessions since World War II that were shorter and/or less severe than these two most recent recessions.
Keep in mind that the stock market is adjusting prices today for its expectations as to how market and economic situations will play out, while recessions are identified in hindsight. Therefore, as 2020 proved, it is possible that the market can begin its recovery before or during a recession. While we expect more volatility to come this year (until we have some clarity on the issues mentioned above), we think a 2023 recession should be relatively mild, historically speaking, as the labor market remains strong and consumer confidence edges up with slowly reducing prices.

The bottom line
There’s no denying that markets are an uncomfortable place to be these days. We are monitoring the situation and your investments, adjusting when we see opportunities to do so. We encourage you to remain focused on your long-term goals and remember that historically the bottom of the market has been when fear and pessimism are at their highest.
If you believe you will have a need for some of your portfolio assets over the next 12 months that aren’t already in cash, please give us a call so we can discuss a strategy to help reduce risk as much as possible on the cash needed in the short-term.

We will continue to navigate these storms together, keeping an eye on your goals, timelines, and tolerance for risk. If you have any questions, please do not hesitate to reach out. As always, we remain grateful for your continuing trust, and hope you know that your well-being remains our top priority.

Sincerely,

 

The S. Harris Financial Group

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of S. Harris Financial Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

 The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

 Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.