Q3 2022: We Weren’t Joking When We Said “Don’t Fight The Fed”
Updated: Oct 19, 2022
A Familiar Fed Playbook
The past three months were no different from the prior six months. The Federal Reserve (“Fed”) has actually increased the speed of its economic pain train with even higher rate hikes. The Fed’s initial .25% raise in March looks like an excuse me check swing bunt compared to the latest three (that’s right, I said 3!) tape measure home runs of .75% hikes! Mix in a pedestrian .50% raise in May, and the Fed rate now sits at 3.25%. And the kicker… they are not done! At least that’s been the party line. Time will tell…
In fact, with investing, time is always our friend, and the more of it, the better. We know from history that the longer our investment timeframe, the better chance of positive returns. With a 15-year holding period, the odds of investment loss are zero. This is a fact.
We also understand that history can give us perspective and guide our investment expectations when faced with an unnatural environment. In this instance, we are referencing the current Fed rate hiking program. Just as they held rates artificially low after the Great Financial Crisis, they are now on a rate-rising campaign, most likely landing too high, probably dropping us into a recession.
How do we know this… history tells us so. This chart goes back to 2000. The grey area(s) represent recessions. During these 22 years, there were two periods identified as recessionary. Before each, the Fed implemented a rate-hiking program that quickly ended with a slowing economy and, ultimately, a recession.
So, when will rising rates, well… stop rising? Based on history… you guessed it - when we hit a recession. That’s the reality. The Fed will tell you when inflation has subsided and heads towards its target rate of 2%. Unfortunately, with the tools at their disposal and the fact they are using backward-looking data, they most likely will shove us into a recession before they know it… literally.
The Fed’s mandate has always been maximum employment, stable prices, and moderate long-term interest rates. Their ability to manage all three by influencing the money supply via the federal fund rate and quantitative easing and tightening is the same today as it’s always been. Nothing has changed. But the difference this time around is that inflation has spiked quite rapidly, causing freakouts spurred by memories of the 1970s! Persistent inflation, or the prospect of it, is not something to take lightly. But, as in the past (even the dreaded 1970’s), the Fed will get this under control, one way or another. Maybe somewhat elevated concerns, but a familiar role for them…
Finding Ourselves In A Familiar Environment
Just as the Fed knows its role, as investors, so do we. For us, the cause of an economic contraction and, subsequently, a stock market correction is less concerning as we are not tasked with trying to fix whatever ails the economy. We are tuned into how best to position our investment portfolio(s) for long-term success. Newsflash, this is not a departure from our daily routine. The heightened stock market volatility would lead you to think investors should be doing something different. Sorry to be the bearer of bad (or good) news, but we’ve seen this movie before…
So, after nine months of a declining stock market driven by a 3.25% Fed funds rate projected to keep rising, dare I say that stocks are ripe for the ‘pickens’. Before you call us crazy, remember that the stock market is forward-looking. The 20%+ drop from all-time highs for the stock market incorporates much of what is anticipated in the coming 6 – 12 months (at a minimum). You know, the R-word.
Within that 20% market drop, plenty of this great Country’s most prominent companies have seen their stocks decline 40%+! As value investors, we like to say that if you like a stock one day, you must love it after it drops 20%, 30%, and 40%. On the flip side, the argument can be made (erroneously) that stocks have fallen this much for a reason. Yes, in the short run, but what about the long run? Will we be in a recession forever?
No matter your current investment stance, with nearly a quarter of the stock market value
erased this year, you must recognize that you are most likely about to do more harm than good by being out of the market. You see (literally), this chart demonstrates that bull markets are built on the shoulders of bears.
Can the stock market continue to go negative… of course. But, as long-term investors, we should be comfortable watching our portfolio decline another 10%+ to ensure we participate in the forthcoming bull market… whenever possible. We must accept the market's volatility to reap the historical average returns. Just the facts, but nothing we are not familiar with…
As always, we are honored and privileged to be your investment advisor sharing in this wealth-building journey! Please do not hesitate to reach out for any reason. As with past corrections, we will undoubtedly come out for the better on the other side. As we mentioned, we’ve seen this movie before (a few times). The characters have changed; we never know when it will end, but we do know it will end.
Have a great holiday season!