The third quarter of 2022 was a continuation of the trends we have seen all year – the S&P500, despite several days of 2+% rallies, was down for the quarter, and the Federal Reserve continued to raise rates, with chatter of an impending recession growing. Over the past few weeks, we heard Jay Powell, the chair of the Federal Reserve, reiterate the need to weaken labor markets to control inflation; the International Monetary Fund warned that the world economy is headed for “stormy waters;” Ray Dalio, the founder of the $140 billion hedge fund Bridgewater Associates, reverse his view that “cash is trash” in light of possibly five years of “negative or poor real returns;” and JP Morgan CEO Jamie Dimon shift his view from a few months ago of a soft landing or mild recession being the most likely outcome for the US to now predicting a recession and talking about how stocks could possibly fall another 20% to 30%!
The current market turmoil highlights a fundamental truth about investing: it is not always easy. The S&P 500 entered bear market territory during 2Q, hitting the negative 20% mark for the year. This is despite overall company earnings growing in Q1. Goldman Sachs analysts estimate that higher earnings contributed a positive ~5.7% return to equity values, which was offset by a negative ~26% return from a contraction in P/E multiple – or the amount investors are willing to pay for a company’s earnings.
In our note to you last quarter, we contemplated the possibility of increasing financial uncertainty on the horizon. Would the uptick in inflation be a temporary phenomenon or potentially something more daunting? While those questions remain largely unanswered, what has become abundantly clear is that the stakes are increasing. Prices have leapt even further over the last three months, with Core CPI increasing from 5.48% at the beginning of the year to 6.50% as of the end of March.1 Even more pressing is that Core CPI excludes food and energy costs, two critical areas of expense for most families. Food prices have increased 8.8% over the last 12 months and energy has increased by 32%, fueled greatly by Russia’s vicious attack on Ukraine.
As we approach the beginning of the third year of the presence of COVID-19, I suspect that most have a balance between fatigue, caution regarding our health, and a desire for a more open way of living. Yes, this is getting old. Quite remarkably though, as much as we have felt an impact on how we live our lives, the vast programs of stimulus and support have kept people that were in harm’s way financially afloat financially during the crisis.
The past year and a half have been quite a challenge for many, and we hear regularly about people’s desire to return to a normal way of life again. While ‘normal’ might not be within immediate reach, we are quite encouraged to be seeing many of you face to face again. It feels great! We are pleased to connect with you in whatever method fits you best, but I can report that the entire Cribstone team is fully vaccinated. If you are comfortable coming in, we would love to see you. Alternatively, Zoom meetings remain a feature of our day-to-day experience.
It was wonderful to see fireworks on the 4th of July, and families getting together again to celebrate. COVID-19 is not fully behind us, with variants like Delta still lurking, and surging in certain parts of the world. Daily life, however, is gradually returning to normal. The markets are somewhat reflective of this, as seen by the CBOE Volatility Index (VIX) being at almost half the levels it was a year ago. The S&P 500 index continues to grind upwards, gaining another 8 percent in the quarter ending June 30. The Federal Reserve remains adamant to maintain an easing stance, although in their last meeting they did signal raising rates slightly earlier – in 2023 instead of 2024.
It is fair to say that everyone has been experiencing some COVID fatigue as of late. Thankfully, warmer weather is on the horizon, state-imposed travel restrictions are loosening, and we are seeing signs of normalcy again. With this optimism comes the logical question – what will our lives look like in the post-pandemic world? Will the US economy return to the low growth, low inflation era we witnessed in the last decade, or will all of this unprecedented stimulus lead to a different outcome?
We all probably have never felt so ready to close the door on a year. 2020 provided more twists, turns, and tragedy than any of us were prepared for, with COVID-19 leaving both human and economic devastation. The human impact that occurred in 2020 is familiar to us all, so we will keep our comments here centered on the economy and investment landscape.
We continue to live in a world of two realities. After a plunge in real GDP at an annual rate of 32.9 percent in the second quarter, estimates for Q3 have risen steadily. The economy has been buoyed by an increase in the level of re-openings across the country, the promise of an accommodative Fed policy for years to come, and a decline in the number of new COVID cases. Initial jobless claims, which recorded 6.8 million in the week of March 27 at the peak of the crisis, are now hovering around 840 thousand. The Atlanta Fed’s GDPNow model estimates real GDP growth for Q3 2020 of over 35%. The stock market performance in the quarter reflects these trends.
We hope you are finding ways to enjoy what has been a fantastic summer thus far, albeit maybe a little quieter than normal. Everyone at Cribstone is doing quite well and making the most of these trying times. Equal to our summer heat, the equity markets have warmed up substantially over the last quarter, recovering most, but not all, of their ground lost from February and March.
I’m reminded of our Thanksgiving tradition, going around the table each taking a turn to express what we are particularly grateful for. Some comments are reflective and carry a sincere, serious tone; others invariably focus on something as simple as ‘I’m thankful for the mashed potatoes’. The events of the last two months have given me pause and made me reflect on all that we are blessed with. All of us at Cribstone are immensely thankful for you, and the responsibility you place in us to make sound judgments in such challenging times.
In a year dominated by trade tension, possibly unparalleled political noise, persistent talk of recession, and a broad slowdown in corporate spending, global equity and debt indices provided returns that have not been rivalled since 1997. Meanwhile, US economic growth stalled, with GDP sinking below its long-term average.
What is perception and what is “reality”? This seems to be the common thread today as people, more than ever, are inundated with information and an abundance of polarizing viewpoints. The markets are not immune to this.
“You can’t have your cake and eat it too”. This old English proverb has been so popular over the centuries for good reason. After all, how can one possibly enjoy both of two desirable but mutually exclusive alternatives at the same time? Apparently in the financial markets is how. Take the middle of June, for instance. While interest rates were falling on growing economic pessimism, stocks in the U.S. were fast approaching record levels on the optimism of a Federal Reserve backstop. Pessimism and optimism can both be a good thing for stocks, evidently.
There have been many nostrums shared about the stock market, but few are as reliable or as relevant as the phrase about the Federal Reserve coined by the late Marty Zweig, “Don’t fight the Fed.” Included in his famous book, Winning on Wall Street, are many of Zweig’s timeless insights about the enormous influence – if not dominant factor—Federal Reserve policy, largely in the form of trends in interest rates, has on stock prices. And there’s hardly a better example of Zweig’s observation than how the stock market has behaved over the past six months.
We are extremely pleased to announce that Amyn Moolji has joined Cribstone’s Investment Team. The world stock market has just gone through a rough patch that certainly reflects the winter doldrums, ending 2018 on a downbeat note. This in spite of the fact that there have been flickers of hope on the economic front, particularly with consumers.
While this year has been quite disjointed, with US Growth Stocks rising and seemingly most everything else falling, we believe strongly that maintaining a well-diversified portfolio has value, both in terms of managing risk and investing for opportunity.
In addition to high crests and low troughs for the market overall, there has also been a wide gulf in performance between winning and losing sectors for the first half of 2018.
If you think you’ve observed a lot more action in the stock market lately compared to 2017, you’d be absolutely correct. Volatility – moves of 1% or more – has returned.
It should come as no surprise that the financial markets reacted positively to the news that Congress had finally passed the “Tax Cuts and Jobs Act,“ December 19.
We are still in the midst of record-setting sessions for the major stock market indices. The S&P 500 has gone the longest number of days since 1929: 346 at this writing.
There have been a number of factors pushing the markets higher this year…the election of Donald Trump and with it the possibility that pro-growth policies are enacted.
What a difference a year makes. Twelve months ago, markets had come through one of the worst sell-offs in history, driven largely by fears of global recession.
Recall that 2016 began as one of the worst ever in the history of the stock market, with the first two weeks of January alone down about 6%. Where do we go from here?
Many of you have asked us, as we have asked ourselves, whether it matters, from a stock market’s perspective, who fills the Oval Office in January. We’re not sure it does.
Our recurring theme is volatility. After a weak start to 2016, where the first 10 days of January were the worst in history, the index finished the second quarter up 2.9%.