Market Update October 6, 2022
2022 is shaping up to be the worst year for stocks since 2008, and perhaps the worst ever for bonds. The Federal Reserve seems hellbent on turning back inflation, whatever the cost may be to the economy, and the financial markets have taken notice.
Domestic stocks as measured by the Standard & Poor’s 500 are down year to date through the end of the 3rd quarter by a discouraging 23.9%. On a local currency basis, foreign stocks are holding up much better despite all the doom and gloom about Europe’s Russia-driven energy crisis and China’s stubbornness in continuing their zero-tolerance approach to Covid with their repeated shut-downs of their economy. However, when the strong U.S. Dollar is factored in, developed foreign economy stocks as measure by the MSCI EAFE index were down 26.8% and the MSCI Emerging Market index was down 26.9% through the 3rd quarter. The formerly high-flying NASDAQ and Bitcoin are no longer flying high, with these down 32.4% and 58.0% respectively during this time.
I have cautioned about the interest rate risk in bonds for quite awhile. We are experiencing a historic bear market in bonds this year, due in part to the Federal Reserve’s rapid increases in the Federal Funds rate. Recall that bond prices and bond yields have an inverse relationship, meaning as yields rise the price of existing bonds falls. Bonds as measured by the Bloomberg U.S. Aggregate index were down 14.6% through the 3rd quarter. Anybody with the misfortune of being invested in long-term government and corporate bonds was down a staggering 28.9% as measured by the Bloomberg U.S. Government/Credit Long index. We have taken measures over the past two years in our broadly diversified, comprehensive portfolio management program to help mitigate interest rate risk in client portfolios.
Sentiment can turn on a dime, as we saw the first two days of October when stocks had their biggest two-day rally since the throes of the market bottom in March 2020. The fuel for this rally was a surprise move by the Reserve Bank of Australia (RBA) to lift their interest rates by only 25 basis points (0.25%) opposed to a widely expected 50 basis point (0.50%) increase. In explaining their rationale for the smaller-than-expected increase, they acknowledged that their cash rate had been increased substantially in a short period of time, implying to me that they recognize the need to allow time to assess the impact of their previous interest rate increases. Their lucidity was refreshing. Financial markets rose sharply in part on the hope that other central banks would consider the RBA’s tack.
Our central bank’s recent track record, however, is disappointing. They went way too far in stimulating our economy, and my concern now is that they go too far in trying to slow it. While their current path of interest rate increases may be appropriate to slow the economy and wage growth, a bigger unknown is what the impact will be of the reduction of their balance sheet. They intend to reduce their bond holdings in the aftermath of their buying binge of the previous couple of years. This could further weigh on bond prices, despite bonds historically being a good investment during a slowing or contracting economy. The yields on short term bonds and cash alternatives are now very attractive and these provide us a much safer option for clients than intermediate and long-term bonds.
So what will it take for financial markets to have a sustained recovery? For starters, better data on the inflation front. While energy prices have dropped significantly (in states other than California anyway), the most recent readings of core inflation which excludes food and energy showed inflation persisting. Improvement in these and evidence of slack starting to build in the labor market should greatly improve market sentiment. And, perhaps the Fed will consider the even-handed approach of their Federal Reserve brethren in Australia and allow some time to pass to see what impact their rate increases are having.
This challenging period conjures up memories of previous financial crises – Black Monday in 1987, the Asian Financial Crisis of 1997, the implosion of Long-Term Capital Management in 1998, the bursting of the tech bubble following the turn of the century, the Global Financial Crisis of 2008, the Covid lockdown of 2020, and the like. These past crises all have something in common. They come and they go, and are typically followed by strong rallies. It is helpful to remember in times like these that you own securities of value, backed by real, profit-generating businesses. At some point in time the markets will again recognize their value.
We wish you an enjoyable, and hopefully more prosperous, Fall. Do not hesitate to contact us if we can be of service or if you have any questions.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
· GSR Capital Management, Inc. is a Registered Investment Adviser. This market update is solely for informational purposes. Advisory services are only offered to clients or prospective clients where GSR Capital Management and its representatives are properly licensed or exempt from licensure. GSR Capital Management is not a tax advisor. Past performance is no guarantee of future results. Investing involves risk and possible loss of principal capital. No advice may be rendered by GSR Capital Management unless a client service agreement is in place. If you do not wish to receive marketing emails from this sender, please send an email to info@gsrcapitalmanagement.com.
· Expressions of opinions are as of this date and are subject to change without notice.
· The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
· The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. NASDAQ covers 4500 stocks traded over the counter. Represents many small Composite index company stocks but is heavily influenced by about 100 of the largest NASDAQ stocks. A value weighted index calculated on price change only and does not include income. The Bloomberg US Aggregate Bond index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S. The Bloomberg U.S. Government/Credit Long index is a measure of domestic fixed income securities, including Treasury issues and corporate debt issues, that are rated investment grade (Baa by Moody's Investors Service and BBB by Standard and Poor's) and with maturities of ten years or greater. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
· Investments & Wealth Institute™ (The Institute) is the owner of the certification marks “CIMA,” and “Certified Investment Management Analyst.” Use of CIMA, and/or Certified Investment Management Analyst signifies that the user has successfully completed The Institute’s initial and ongoing credentialing requirements for investment management professionals.