Dear Valued Investor,
In the last several weeks, we have continued to face elevated uncertainty in financial markets due to high inflation and rising interest rates. We felt it was an important time to take stock with the final quarter of 2022 just ahead.
It has been a difficult year, not only for investors but also for households and businesses as we all navigate higher prices and borrowing costs. There will be some challenges ahead for the economy as the Federal Reserve (Fed) continues to raise rates to control inflation. We believe the Fed is doing the right thing for the long-term health of the economy, but it doesn’t feel good in the short-term.
Given the recent market volatility, we are receiving many questions regarding our outlook for the investment environment. We believe the Fed will continue working to slow demand, and eventually they will get their way and tame inflation; however, quite possibly at the risk of putting the economy into a recession. Whether or not the Fed can tame inflation without sending the economy into a recession is yet to be seen.
When we evaluate the current market environment it’s obvious that we are in the late stages of the market cycle, and a recession could be looming. Earlier this year, we made portfolio adjustments in preparation for this late-stage environment we were experiencing, and we continue now to favor a defensive position as a recession becomes more probable. At the same time, we also recognize that bear markets provide opportunity for the patient investor, so we are taking advantage of these opportunities as inflation decelerates.
The level of bearishness right now is very high, but it’s important to remember that historically extreme negative sentiment has often been followed by strong market performance. To take just one example, the American Association of Individual Investors (AAII) has been doing a weekly survey since 1987. Last week’s survey had a level of bearishness seen only four other times before. S&P 500 returns a year later in those cases averaged over 30%. We don’t know whether that will happen again, but there’s still an important takeaway. As we experienced in 2020, when a lot of negative sentiment is being priced into markets, it may set the bar low for stocks to outperform expectations. In addition, some of the recent market volatility came from mixed inflation signals, so as these signals become more aligned, we expect volatility will fall and investor sentiment will improve.
We also have some positive seasonal patterns ahead. November through April are historically strong months for equities. Stocks have also done well after mid-term elections. And the third year of the four-year presidential cycle (which we enter in 2023) has historically been the strongest for stocks.
The recent declines are concerning, and we can’t be certain when the volatility will end. However, we do know that conditions continue to indicate that better times are ahead. Market volatility and negative sentiment can make it harder to make investing decisions, but we believe the surest path forward is focused on continued patience and sound financial advice from experienced and dedicated professionals.
As always, please reach out to us if you have any questions!
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of September 27, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions.