Year-to-Date Market Recap
“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” –Seth Klarman
We hope this note finds you and yours doing well. As summer draws to a close and the school year begins, we have been reflecting on a crazy year – from the drawdown of the pandemic to the Russian invasion of Ukraine, stubbornly high inflation to daily political drama, and plenty of stock market volatility into the bargain.
No bones about it: the first half of the year was painful for both the stock and bond markets. This was followed by the fourth best July in history, which saw the S&P 500 gain 9.2% and reduce its year-to-date losses by a large margin. Since August 16th, the index has dropped once again by a little more than 8% as of this newsletter, though still above the year’s low point of June 16th.
The latest round of volatility has been exacerbated by the Fed’s approach to monetary policy, which has maintained a hawkish stance in which combating inflation takes first priority, even given potential cost to economic growth and employment. Powell took pains to state that there may be some pain to households and businesses if raising interest rates leads to a softer job market. We are already seeing signs that inflation may be falling off. Recent reporting for the CPI and the Personal Consumption Expenditures index have eased, and import prices are falling. During the ten worst market drawdowns since 1960, six months after hitting bottom, stocks have returned 30% on average, as you can see in the chart below from Hartford.
When it comes to the bond market, the Fed has indicated it plans to stay the course with its pace of interest rate hikes. The yields of existing short-term bonds have already gone down based on the anticipation of a rise in the federal funds rate to 3.75% over the next six months. The yields of existing thirty-year Treasury bonds have also declined, signaling that tighter monetary policy is causing investors to anticipate lower growth and lower inflation. Because of this, the yield curve, which reflects the difference between short and long-term rates became more inverted. This has historically been a leading indicator of a recession. The chart below from Blackrock shows how various asset classes have performed on average a year after the yield curve inverted. However you slice and dice it, the average returns have been positive.
As anxiety-provoking as these times can be, our recommendation continues to be to stay the course. Review your long-term financial plan. When are you planning to access your funds, and over how long a time horizon? Riding out volatility is much easier when you have clear visibility of your financial goals, and taking the long view can help lessen short-term stress.
We also try to avoid timing the markets with buying or selling based on particular performance. Time in the market is what matters, and staying invested avoids the possibility of selling when markets are at their lowest and losing the ability to ride them back up.
Lastly, know that we are rebalancing your portfolio regularly. Market changes like these can change the proportions within your account away from their targets. Our aim is to keep your allocation and risk tolerance in line with your long-term goals.
We will be following up with a newsletter on the College Debt Forgiveness program soon.
We appreciate you as part of the Horst & Graben family. Please do not hesitate to reach out with any questions or if you would like to review your plan.