From the Desk of Our CIO…
September 2022 Observations
Where We Are.
Retesting June’s support. Between June 16 and July 16, the S&P 500 gained +17%. Stocks as well as bonds were generally quite oversold by that mid-June date: NFLX, PYPL, ZM and META were added to Value indexes at the end of June. Following that healthy bounce, stocks have been taking a breather, giving back -4% in August. The near-term S&P 500 support level to watch for is 3660. Treasury bonds have also given back some gains as the 10-year yield has backed up to 3.30%, having enjoyed the June-July rally when the yield dropped from 3.50% to 2.50%. During August, the benchmark Treasury fell -4%. As of 8/31, the S&P 500 is off -17% YTD, while developed foreign markets and emerging markets are down -21% and -20%. US mid cap is down -15%, while small cap is off -19%. Value continues to outperform Growth this year, down -10% vs. -24%. Only two sectors are positive YTD: Energy, up +44%, and Utilities, +5%. Laggards include Communications down -30%, Consumer Discretionary -24%, Tech -23%, Real Estate -19%, Materials -18%. During August, drops across the board averaged 4-5%.
Where We’re Headed.
All about inflation and the Fed. We reproduced the actual/expected charts for GDP, inflation and earnings on the next page again, as a reminder that growth and inflation are widely expected to return to pre-covid levels in 2023 and 2024 – and not in recession. We also included the probability table for where folks think the policy rate will land. For the time being, all eyes seem to be fixed on what the Fed is going to do on the 21st of September, and what the commentary will imply. A month ago, the probability table showed a 70% chance of a 50bp increase, with only a 30% chance of a 75bp hike. Today, those probabilities have reversed. This change in expectations, driven by Powell’s comments at Jackson Hole last Friday, have pushed stocks lower and bond yields higher. Looking out further into next year, the majority opinion today (53%) suggests a Fed Funds range of 3.50% to 4.00% by May 2023.
Since none of us knows the future, foundational portfolio management principles still apply. Adjusting overall asset allocations based on client circumstances aren’t passe, and at the very least, adjustments in style (i.e., dividend vs. growth) or fixed income security selection (i.e., individual treasuries vs. managed funds/SMAs) can help more anxious clients successfully negotiate this obstacle course. Give us a shout if you’d like to discuss.