We hope that everyone had a great summer and is settling back into their regular routines this fall. Unfortunately, markets (both stocks and bonds) have been anything but routine as the volatility that began in the first half of the year continued during July, August, and September.
In the third quarter, domestic large cap stocks fell by -4.9%, domestic small cap stocks declined by -2.2%, international stocks were down -9.3% and domestic bonds dropped by -4.8%.1 On a year-to-date basis, the third quarter left most bond indices down more than -14% while stock indices were down more than -24%. If you put these numbers into a historical context, the ten-year US Treasury is on pace for its worst return in history (dating back to 1928) and a portfolio of 60% stocks and 40% bonds is on pace for its worst calendar year return since 1937. 2
We realize these are some staggering statistics, but it is also important to note that not all market movements over the past few months have been negative and instead have been notably positive. From June 17th through August 16th the S&P 500 rallied +17% over the course of eight weeks. In addition, during the first two trading days of the fourth quarter the S&P 500 rallied +5.7% which is the strongest two-day rally since March 2020.3 What is notable about both rallies is that neither was precipitated by major news signaling a sentiment shift thus making them very difficult to predict.
Given that our expectation is for volatility to continue for the coming months it is very important to stay focused on your long-term goals (not short-term market movements) especially considering the domestic and geopolitical issues that sit on the horizon.
The most critical issue that continues to challenge markets is inflation which as of the August reading continues to exceed 8%.4 In response to that elevated reading, the Federal Reserve implemented a third consecutive 75 basis point (0.75%) interest rate hike during the third quarter and signaled to markets that there are more increases to come during their last two meetings of the year. Over the next 30 days, we will also see the domestic political environment move back to the forefront of the news cycle with midterm elections on November 8th and the possibility for a shift of power in the House and/or Senate. On the geopolitical front, Russia’s conflict with Ukraine is about to enter its eighth month and tensions seem to be escalating with Russia annexing four regions of Ukraine this past week.
We acknowledge these are unsettling times but some of this is to be expected when making investments. In a recent interview in Barron’s with one of our bond managers, when asked about if there is a bright side to this year’s market declines, he responded that “It is healthy. Markets have a rhythm to them. Every few years, they recalibrate, and then you can count on a good three or four years. But you need to have that recalibration, even if the process is unpleasant”.5 We know this is challenging to realize when you are seeing mostly negative headlines and market declines daily; however, our experience has taught us to have patience during these difficult times.
We appreciate your trust and confidence in all of us at MSA Financial. Should you have any questions or if you would like to schedule time to review your portfolio or discuss the economic environment, do not hesitate to contact us.
1Market segment (index representation) as follows: Domestic Large Company Stocks (S&P 500), Domestic Small Company Stocks (Russell 2000) International Stocks (MSCI EAFE), Domestic Bonds (Bloomberg Barclays US Aggregate Bond Index), Growth Stocks (MSCI World Growth) and Value Stocks (MSCI World Value)
60/40 Portfolio consists of 60% S&P 500 and 40% Ten-Year US Treasury Notes
4 Consumer Price Index (CPI)
Quote from Rick Rieder Portfolio Manager for BlackRock Strategic Income Opportunities Fund – Chief Investment Officer of BlackRock
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