Third Quarter Commentary
If you have a long history with New Orleans, you may remember Pontchartrain Beach. It was a popular amusement park founded and run by the Batt family from 1928 until it closed in 1983. It had rides (including an infamous wooden roller coaster called the Zephyr), a beach with swimming in the lake, live music concerts (yes, Elvis performed there) and many other forms of entertainment and dining. In June,2022, a revitalization plan for Pontchartrain Beach as a public recreation area was announced which caught my attention.
So what does this have to do with the markets? Well, some days it feels like we are living in Pontchartrain Beach. Part Zephyr roller coaster, part House of Mirrors or Wild Maus, the experience of a wildly unpredictable ride is real. Yet we know, like our visit to an amusement park, it will not last forever.
We remain true to our belief that staying invested and well diversified provides the best results for the long-term investor, even in troubled markets.
You may remember we closed the second quarter in June with the stock market falling into bear territory, adding to an already difficult first quarter. We then kicked off the third quarter in July with a surprisingly strong rally considering there was no real improvement in the economy. The strength of corporate quarterly earnings announcements, plus the whiff of a suggestion that the Federal Reserve may not increase interest rates as aggressively as feared, created optimistic expectations leading to a bear market rally. Unfortunately, those optimistic expectations were not sustained through September 30th.
The stock market, as represented by the MSCI ACWI world stock index, retreated -6.82% during Q3, with the year-to-date performance at the end of the quarter at -25.63%. The S&P 500 index did slightly better with year-to-date performance of -23.87%.
The Bloomberg Global Aggregate, a diversified world bond index, was also down -6.94% at the end of Q3 and -19.89% year to date. The Bloomberg US Aggregate performed better but still retreated -4.75% in Q3 and -14.61% year to date.
Of the declines in the stock and bond markets, it is the magnitude of the bond market decline that is likely the most surprising to investors. Bonds are known for the support they provide portfolios during difficult markets but, in fact, this could end as the worst year of performance for bonds — in history. Yes, ever.
The speed with which the Federal Reserve has increased rates in the past six months (to 3-3.25%) has pounded the bond market, and it is expected that rates may be raised another 1.25% before the end of the year. Rates are rising faster than any other time since the early 1980’s, with a goal of reducing intractable inflation. The reason for the quick and dramatic rate increases is that we began the process in March 2022, with a high inflation rate of 6.8%, which then rose to 9.1% in June and landed at 8.3% in August. World events are adding to the inflation problem with no clear end in sight. We still have a way to go.
Recognizing that continued increases in interest rates will slow the economy by design, the stock market results followed suit with poor performance. The previously robust performance of growth stocks has reversed trend while value stocks have performed better on a relative basis. Both, however, are down significantly for the year. Prospects of a recession add to the negative sentiment for stocks near term, and all eyes are upon the upcoming corporate earning announcements.
What are we doing?
It may be easier to begin with what are we not doing. We are not bailing out of the market. We recognize the economy as a cycle that creates reversals. The game of getting out, only to then try to get back in at the right time, is often more damaging than helpful.
The historical pattern is that the anticipation of recovery will cause the markets to improve several months before the economy improves. Missing out on those early moves upward has proven to disproportionately damage the long-term performance for investors. Cycles do not have to repeat history, but we believe the past helps to inform decisions today.
As for what we are doing, we are sticking to the disciplines we have established by:
- Continuing to monitor our holdings, for any signs of concern
- Looking for and executing strategic moves that we believe will help the portfolios now and in better times
- Keeping our eye on what comes next for our clients, with some seeking market entry and others looking for cash-flow management
- Considering tax-loss harvesting where appropriate
We are being patient and our eyes are focused on the future. When inflation begins to ease, we believe the market will return to optimism. We believe long-term investors will do well by staying invested and diversified, despite the rough ride along the way.
Upon completing a ride on the Zephyr, you probably felt a combination of exhilaration and wooziness. Over time, the exhilaration won the day making you realize that you were glad you stayed on the ride instead of getting off before it climbed to the top of the first Lift Hill.
For disclosures, please click here.