If you're in a hurry, TLDR below.
Investors ended the third quarter with a near-record-level of pessimism, according to the AAII Investor Sentiment Survey. This doesn't come as a surprise given that September saw the market's worst monthly performance since April 2020, when the world was essentially imploding. Year to date, the S&P 500 is down ~25% and the Tech-heavy Nasdaq is down ~34%, with many smaller, formerly high-flying tech companies down 60-80%. And given the rapid rise in interest rates (the fastest relative rise in history), the usual safety of bonds has been completely thrown out, with the 30-yr Treasury bond down ~32% YTD. Anecdotally, I haven't felt this much market negativity since I was working remotely in September 2008, displaced during Hurricane Ike, and reading overnight that Merrill Lynch and Lehman Brothers were declaring a forced sale and bankruptcy, respectively. Maybe we've been numbed to any comparisons at this point...
The question is: are things really that bad right now?
If you were to look at an admittedly incomplete list of the issues with which we are currently dealing, you would authoritatively say, "Yes, the world is ending!"
Inflation is at multi-decade highs in the US and Europe, with Argentina & Turkey above 75%. While some commodities and prices have come down a bit, food inflation is still a major issue across the world. Most countries' central banks are still aggressively raising interest rates to fight inflation, which has barely started to take hold and can potentially put a halt to economic growth, as feared by the UN.
Putin's inhumane push to advance in Ukraine, despite meeting unforeseen challenges, is leaving western nations with little choice other than to increase their involvement. Putin has already threatened nuclear action multiple times, and a clear global division is forming.
European Energy - Putin's decision to shut off gas to Europe via shutdown and explosions of Nord Stream pipelines 1 & 2 have increased tensions and awareness of his willingness to act.
Political Instability - Italy, Brazil, Belarus, Turkey, Hungary, the US, and a seemingly endless list of countries are still dealing with right-wing populist leaders who are eschewing unity and reason in favor of division, ego, and falsehoods, and are destroying national resources, standard of living, and political allies along the way.
GBP - Inflation has hit the UK particularly hard given its reliance on Russian gas and Brexit-related economic issues. A sudden and irrational tax-cut proposal from newly elected PM Truss plummeted the currency even further before she was prompted to call off the proposal. But this hasn't cured the underlying problem.
Crypto - A lack of regulatory clarity around whether some cryptocurrencies should be considered securities (and therefore regulated by the SEC), along with a series of blockchain related failures and hacks, has weighed heavily on crypto prices. But the primary consideration is whether an "asset" without any inherent value can actually hold its value without the support of 0% interest rates.
Layoffs - Companies are continuing to hire cautiously and in many instances initiate aggressive layoffs, in preparation for decreased demand and a more difficult economic environment.
Labor remains quite constrained, especially in low-skilled sectors, and worker dissatisfaction is growing.
Corporate Earnings growth is expected to continue decreasing, potentially leading to actual earnings declines.
The US Dollar is up significantly against a pool of other currencies, which is helpful for Americans' purchasing power, but wildly destructive for foreign purchases that require USD (see most commodities that are priced in USD) as well as for American companies that generate significant revenue overseas.
The upshot to the list of doom is that:
Russia's war is not as immediately successful as Putin thought going in (and facing major setbacks), and he is draining resources and losing allies.
The Labor market overall in the US is quite resilient right now, and unemployement is still only at ~3.5%. It may be able to withstand further interest rate hikes without major damage to jobs.
Corporate Earnings remain fairly strong for now.
The US Dollar is likely closer to its peak value against most other currencies at this point, as the Fed is ~2/3 to it's goals regarding interest rate hikes. We could see this peak very early next year if current trends continue.
Given the seemingly unending list of issues looming over us, the real questions are:
Can the current system absorb all of these issues?
Are any of these issues going to get meaningfully worse or cause another unseen event?
Economies rarely just run out of steam; rather, it's generally an issue or a chain of events that spark a larger problem.
Is there anything to be optimistic about?
How will markets react in these possible situations?
How does your strategic financial plan change based on all of this?
Our stance hasn't changed over the past year. We still believe that we are going to experience a recession in the US in 2023, and likely a much worse recession elsewhere globally. While we don't believe this recession will be quite as bad as what we experienced in 2009 during the Great Financial Crisis, we think that it is irresponsible to assume that it will be a "mild" recession, and we expect that a "hard landing" could cause severe dislocations in various parts of the economy, especially for consumers already battling unsustainable financial situations involving low wages and sustained inflation.
For money that is needed in the next 1-2 years, we are still very conservative about ensuring that these funds are available and should not be put at risk.
Interest rates on cash and short-term bonds have become fairly attractive and will be increasingly so for the next year, finally providing an investment solution for short-term funds after a decade without any options.
For money that's not needed for 5+ years, equity valuations are becoming more attractive, and there is an opportunity to put new funds to work in public markets, likely followed by certain dislocated private market opportunities thereafter, with an expected lag.
We never try to time markets or wait for a peak or trough in valuations. Rather, we want to make informed, directionally accurate decisions. Buying long term holdings at increasingly more attractive prices within a tailored financial strategy is a proven strategy.
Though it's not required as a signal that the worst is behind us, equity markets haven't yet experienced the true spike in volatility that is typically seen during the most fearful times, as seen below. So we believe that it's likely that things could get worse from here.
The best days of market performance are often in the middle of a bear market and follow the worst days, so we want to make sure to continue communicating and discussing specific plans so that we avoid making any drastic, emotional decisions.