October 21, 2022
Please reach out with any and all questions you may have. We are closely monitoring the markets and portfolios. But, let’s ensure we are still on course with your goals and nothing has changed with your particular lifestyle or situation.
Thoughts on Q3 and the summer
I hope you had a chance to read our last commentary (www.GladstoneHFS.com heading HOFFMAN MARKET COMMENTARY).
Throughout the summer months, the Markets have, for the most part, conformed with the expectations stated in our June Commentary. We had multiple ups and downs in the 10% range. Our outlook for the last 3 months of the year are positive with some upward movement which will hopefully pare off some of the yearly losses. We will discuss in further detail in section “Outlook-End of Year”.
The US markets and the numbers aren’t pretty: through the middle of June, the S&P 500® Index (“SPX”) was down approximately 21%, with the NASDAQ (“NDX”) down 31% year-to-date and the Dow Jones Industrial Average (“DJI”) was down 14%.
August started out tremendously well with a 2 week gain of approximately 9%. It looked as if we could be seeing an upward swing and our 4th quarter call could be coming early. However, with inflation still running hot, that quickly stalled and we saw those gains erased in the last two weeks. Then came September. Historically, September is the worst month for stock performance while the final two weeks of September is historically the worst two-week stretch for the year. This year proved to hold true to that standard.
September’s negative history was compounded by the “Fed” ( Federal Open Market Committee-FOMC) raising the Feds Fund Rate by 75 basis points. This raise and more so Chairman Powell seeing rates being raised through 2023 and possibly 2024, drove the S&P 500 down an additional 5% or so.
How does this broad market affect your portfolio and investment?
We have yet to hear of someone that can predict when exactly any market will hit its’ peak or bottom. But, looking broadly at the history and the cycle of the markets informs us about where markets may be heading in the next 3 months or 5-10 years. Given this information and history repeating itself, our focus during this time is to ensure your overall portfolio and the individual holdings meet your goals, and are performing at an appropriate risk adjusted level, while maintaining our eye on the future. Now is the best time to ensure the current conditions and your goals are still aligned.
We should be reviewing certain factors in particular:
Timeframe - When will we need to start taking money from the investment?
Objective - What is the purpose of the investment?
Risk - What is our expectation of risk vs reward?
We continue to allocate portfolios based on these goals and set return expectations based upon the S&P 500 and other indices. We cannot control the broad markets or the economy. But in times like this when these broad based goals can seem to be in direct competition to the current market conditions. We can control the portfolio, the individual investments and try and take advantage of the possible opportunities presented. Some of these small advantages during volatility allow us to review, rebalance portfolios and reinvest dividends. Rebalancing plus the addition of dividends, and the addition of cash, allows purchasing shares at a possible lower share price. Thus, the old expression “buy low, sell high”. This can help create greater returns and limit losses in the long term and, if the market rebounds quickly, possibly short term.
Recession?
Stocks can be a leading indicator or signal of recession. Stock prices can mirror what investors and companies think about their future earnings. A stock is sold or bought on the premise that a company will be making more money or less in the future. If investors feel future profits may be lower we see what we have seen in 2022 which is falling prices. Those prices will fall until investors feel they are at a reasonable price, a price at which buyers believe will be profitable in the future, a bottom occurs and the buying begins again creating a new cycle.
Stock prices so far in 2022 may be foretelling that there is a recession coming or is already here. In years past we have seen the Fed and our politicians be historically late on calling the beginning and end of recessionary periods.
Historically, an average recession lasts 10 months. The traditional definition of a recession is “2 quarters of negative economic growth”. This already occurred at the beginning of this year. While there are many other factors that are positive and oppose the traditional definition of a recession, the American populace seems to know and feel when we have hit a recession. The federal government looks “back” to when a recession started not forward. If this “oncoming” recession has already started, we should be within a 10 month time frame to recovery and continued growth.
One of the last pieces of information as to why we predict a strong end to 2022 and a positive 2023 have to do with corporations themselves. Corporate earnings have been strong and cash reserves are up. Profitability has been up. Due to these high profits and a declining stock price, 1 trillion dollars in 2022 is going towards “stock buybacks”. This is when a company uses its cash to buy back its own company stock. This can bolster and increase the stock price, as it shows a company believes its stock is profitable as well as create a demand for its shares. There is some headwind here, as President Biden did sign into law an excise tax on these buybacks. However, this profitability and cash, if not used for buybacks, can be used for higher dividends and higher wages (less likely). The point is the profit and cash exist, which among others, is fundamentally why a stock is purchased. This can make for the basis of healthy economic growth.
Outlook- End of year
“A Rising Tide lifts all boats”
We are in a time of market low tides and the market has been receding. However in life, low tides are followed inevitably by high tides and rising waters. When the tide comes back in all boats will rise, unless you remove your boat from the water.
We often wish the markets would just go straight up and have no downside. This is not the case nor will it ever be. That said, in the last 65 years the S&P has seen an average return of about 11% per year. Even more so, accounting for this rough 2022 and great recession of 2008, the S&P has averaged about 9.57% per year over the last 20.
With the S&P 500 down 21% in 2022, we can look at 9 single days which can account for the decline. Without them, the index would be up 8.6% year to date.
All of these historic numbers lead us to look at several trends for Q4 of 2022 and into the new year of 2023. One of the historical trends that justifies our scenario that stocks should be leveling out are our upcoming Midterm Elections. Whether, Republican or Democrat, the evidence since 1950 states, there have been 18 midterm election cycles, and in the twelve months following each of those cycles, the stock market has had a positive return (Chart A1). We have seen an average increase of 18.6% 12 months after a mid term election. We believe there is more chance of these trends continuing than remaking history. However, we proceed with cautious optimism.
With September behind us, October tends to be a positive month for the markets. While all markets, days and years are different, there are some trends we have seen in bear markets which show the selling stop and the last 3 months of the year having strong gains. That leads us into 2023…..
Outlook- Next 6 - 12 Months
While we have addressed our positive feelings for October, November and December, we feel the selling may resume January through March 2023. This would be the old adage “1 step forward 2 steps back”. We will be looking very closely at those months and readjust portfolios accordingly. But, for most investors, gains are a long term outlook. The first 3- 6 months of 2023 should shed some light on our “12 month prediction” of the markets being positive from today.
Chart A2
