Rough Seas Make Tough Sailors
Various people have been quoted saying “A smooth sea never made a skilled sailor,” with the antithesis being that rough seas make tough sailors. Outside of sailing on the open seas, something similar could be said about investors and the stock market. It has been relatively easy to make money in the markets over the past several years, especially since there was a “Fed put” where the Federal Reserve would lower interest rates or increase liquidity to help stabilize markets in times of turbulence. With inflation stubbornly remaining near 40 years highs, the Fed is now forced to raise interest rates and no longer has the option of providing support for the markets making them much more difficult to navigate.
Investors should be glad the month of September is now behind us; a month in which we saw the S&P 500 and Dow Jones Industrial Average both fall by 9% and the Nasdaq drop by 10.5%. The S&P 500 wrapped up the first three-quarter losing streak since 2009. There was also continued pain in the bond markets with the Bloomberg Bond Aggregate losing 4.3%, as a result of interest rates quickly moving higher.
The quarter began with sentiment that the Federal Reserve would not need to tighten monetary policy, or raise interest rates, much more and in fact would be able to begin lowering rates in the early part of next year. Following economic releases showing inflation remains elevated and comments from Fed officials stating they will do whatever it takes to rein in inflation, it became apparent the Fed will need to continue to raise interest rates and keep them higher for longer, putting considerable pressure on the markets and leading to the recent pullback we have experienced. Further, interest rates have been rising so quickly throughout the year, this is the first time in history long-term Treasury bonds have lost more value than stocks during a time of an extreme drawdown in stock prices.
The New World
The days of smooth sailing we experienced in the markets over the past decade seem to be over and we are entering a new paradigm, but not one we have not seen before. Similarities continue to be drawn between now and the two previous bear markets of this century as well as the high inflation times of the 1970s. Yet, there are also some notable differences between now and each of those times, hence why this is a new world where investors and savers alike need to adapt to be successful and achieve their goals.
Last week the Old World provided a glimpse into what could be in store for economies across the globe. The Bank of England announced it would intervene in the Gilt market to restore orderly functioning in the wake of tax-cut plans announced by the government. Currently the U.K. is experiencing inflation around 10% and cutting taxes is widely believed as being inflationary since it enables consumers to keep, and therefore spend, more of their money. Conversely, many economists believe a tax hike would help reduce inflation, depending upon the type of taxes and how the tax money is spent. No doubt the U.S. government is watching what is unfolding in the U.K., making it very unlikely taxes will be going down in the next several years with a higher probability they could move higher.
Back on the home front, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) report last week was hotter than expected. Inflation may be moderating but despite optimistic hopes of investors and consumers, is not falling significantly and is not expected to for quite some time. Interest rates are now projected to remain higher for longer. Given the heightened volatility in the markets and possible slowdown in economic activity, some belief remains the Fed will come to the rescue by pivoting and lowering interest rates. For that to happen, it is likely something must “break,” which could imply an even worse scenario in the markets. Be careful what you wish for; you may not like it.
At a full 8 months, this is now the longest bear market since the 2007-2009 financial crisis. The average length of a bear market is 14 months but there is considerable variation around that number. For the S&P 500 this is the fourth worst first three quarters of the year in history, but there is hope for brighter days ahead since in most instances where the market was down year-to-date, it rallied during the fourth quarter of the year, with the exceptions being during the Great Depression as well as in 2008. Wall Street lore is that October is the most dangerous month for the stock market but when reviewing history, we find this is not the case. That distinction goes to the month of September.
A couple of things to keep in mind: if you are a long-term investor, none of this discussion matters much. Just maintain your normal allocation to stocks and don’t be shy about buying stocks at normal intervals. That way you will be buying at low prices and stocks should be worth substantially more when you are spending down assets in the far away future. During this time of volatility, it is critical to have help navigating the choppy seas and remember, storms do not last forever.
We would like to extend an exclusive invitation to our next TaxSmart™ Summit on Thursday, October 13th with Becky Ruby Swansburg. Becky spent her early career working in Washington, D.C. with members of Congress and the White House under the second Bush administration. Her work on tax policy and America’s savings habits turned her attention to the urgent needs of today’s retirees. With her policy background and extensive retirement planning knowledge, Becky provides a wealth of information. If you want to learn ways to help protect and position your retirement assets for long-term success, no matter what future market and tax conditions may bring, you will not want to miss this event. Call us at 952-460-3290 to reserve your seat or click this link to register online.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # 952-460-3260