Special Release – Revisiting the Lows
While fall has arrived, client conversations suggest that most are ready for 2022 to be over. Disappointment and uncertainty have been key themes recently, particularly with elevated inflation and geopolitical events dominating the headlines. While equity markets rallied heading into August, sentiment quickly reversed and the S&P 500 is now back to the lows seen in June.
Investors remain hyper-focused on inflation, and there are signals that it has peaked. However, August’s Consumer Price Index (CPI) report completely missed expectations. Both the year-over-year headline CPI, which includes food and energy, and core CPI rose from the prior month. This offset several economic data points indicating stability in certain areas of the U.S. economy.
In August, the Federal Reserve (the Fed) doubled down on their commitment to price stability, and keeping today’s inflation problem from being embedded in society, as it was in the 1970’s. During Fed Chair Powell’s speech from Jackson Hole, he commented that “the Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone.”1
The Fed has increased the Fed Funds rate five times this year, to a range of 3%-3.25%, while setting expectations for an additional 1% increase by year end. That was more than economists were expecting, and the effect rippled through sovereign yields and currency markets. The volatility in all markets has kept investor sentiment at very low levels. Higher interest rates pressure economic growth, increasing the probability of a recession.
From a portfolio standpoint, we have lowered equity allocations throughout the year and in many cases reinvested sale proceeds into fixed income, where bond prices and yields have become attractive. Cash balances are elevated to meet client cash flow needs and take advantage of buying opportunities in the future. There is potential further downside risk to equity markets in the near term, though at current levels we believe a majority of the decline has already been factored into equity prices.
Bear markets never feel good, but with a long-term perspective, they should be viewed as a healthy component to investing. As always, your relationship team is happy to discuss any questions or concerns you may have, and to talk about your specific circumstances directly.
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