November 3, 2022
Dear Clients & Friends,
The month of October delivered on its track record as a historically positive month for stocks, offering some much-needed relief for investors as the S&P 500, the Dow Jones, and the NASDAQ all finished the month higher. The overwhelming negativity that was plaguing the stock market had gotten a bit overdone after investor pessimism during September reached even lower levels than during the Great Financial Crisis in 2008/2009. From a contrarian perspective, extreme pessimism can often be followed by a market rally. As the legendary investor Warren Buffett likes to remind us, “be fearful when others are greedy, and greedy when others are fearful”. The gains in October helped deliver on that message again, though they have only slightly offset this year’s losses during what has been a very tough environment for capital markets.
While it may be easy to consider the October market reaction temporary, there are some potentially sustainable developments that may continue to provide a modest tailwind for equities. First, investors may have begun to look beyond current inflation pressures and the Federal Reserve monetary policy tightening cycle toward potentially better conditions in 2023. The market is always forward-looking, and asset prices tend to reflect what may happen months ahead. As I often remind our clients, “current prices reflect future expectations”. If investors continue to look ahead to better inflation readings (inflation has been coming down after peaking in June) and an eventual end to the Fed’s rate hikes, asset prices may begin to reflect some growing optimism among investors.
The Fed may have been slow to attack inflation (emphasis added), but its policies are slowly working. Jobs and housing markets have been cooling, two inflation variables the Fed is seeking to influence. Some recent softening in economic data, coupled with signals from the bond market, may be indicating that Fed policymakers’ concerted inflation fight may be closer to the end than the beginning. We will be paying close attention to potential subtle directional shifts in Fed policy expectations, which may be instrumental in shaping future market direction. As I’ve written before, the markets will not advance significantly higher and restore new all-time highs until the battle against inflation is won.
We are well aware that finding reasons for optimism from a stubbornly poor equity and bond market trend is no easy task. However, times like September when pessimism is at an extreme and emotions are running high, is often when investors need to steadfastly adhere to a clear-eyed view of market history and strong financial/investment plan.
As we look ahead, the months of November and December have historically been positive for asset prices. This year’s calendar is complicated by political implications of the midterm elections, but markets historically have responded positively to the opportunity for course correction that mid-term elections provide. We should also have slowing corporate earnings growth and greater economic uncertainty to contend with, which makes for some formidable seas to navigate. However, with attractive equity valuations, new income opportunities in the bond market, and a likely less-antagonistic Fed in 2023, there may be emerging reasons to believe that next year may be more fruitful than the last.
As always, thank you for your continued trust and loyalty. Our primary mission at Mercer Partners is to help our clients retire comfortably and stay comfortably retired, so if you have any questions or if you would like to discuss your financial/investment plan in more detail please contact us directly-- that's precisely what we're here for.
Nick Enzweiler is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group, a registered investment advisor. Strategic Wealth Advisors Group and Mercer Partners Wealth Management are separate entities from LPL Financial.
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.
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All index data from FactSet.
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