September brought another downswing in the bear market that we’ve been in for most of this year. Through the third quarter, domestic stocks are down 25% and foreign stocks are down more than 30%. Adding insult to injury, the bond market is down almost 15% year to date, the worst performance for bonds in the last seventy years. Many factors have contributed to this situation, including valuations that were too high, fiscal and monetary policy mistakes, supply chain bottlenecks, Russia-Ukraine, etc. However, the primary reason for both stock and bond market declines is rapidly increasing interest rates—caused by the Federal Reserve’s response to bringing inflation under control. Rising rates translate into lower stock and bond prices in the short term.
What’s the outlook? In the short term, we have to be prepared for rates to go higher, continued volatility and the potential for further market declines. Interest rates need to be higher than the rate of inflation and we aren’t there yet. This is painful to watch but we have to maintain a healthy perspective. Markets are cyclical; significant declines are a regular and recurring feature of the stock market. In fact, we have experienced bear market selloffs on average once every five years going back to 1980. Despite the pain, it’s not all bad news. Stock valuations are moving to much more reasonable levels and bond yields are the most attractive they have been in many years. When inflation does pull back, it will open the door to sustained growth and market gains. Bear markets have historically lasted about 15 months on average and have typically been followed by bull market runs of 5 to 7 years.
What should long term investors do now? As we’ve said, market volatility and declines are unsettling but not unusual. Some investors may be tempted to run for the exits in a market like this, but historically that has been a mistake. Instead, we have to stay calm, disciplined and execute on our long term investment strategies. We look to take advantage of the opportunities that are presenting themselves in the middle of this tough market, including:
- Rebalancing back into assets and sectors that have sold off the most (e.g., technology and small cap stocks)
- Shifting the fixed income portfolio towards more intermediate bonds as their yields have climbed to 5 to 6%.
- Tax loss harvesting to capture tax losses that can be carried forward to future years.
We understand the angst that a market like this can create. Do not hesitate to talk to us about your concerns; we are confident that we will get through this tough market and will continue to focus on your long term financial plans and goals.
Thanks for your support,
Matt and Andrew