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Oakland, CA | Piedmont; Rough Year: September Third-Quarter Update for 2022

SYNOPSIS: The worst year for bonds on record. The trading from one day to the next, both up and down. We now know The Fed should have started raising rates (reducing liquidity) maybe a year ago.

The labor market is showing signs of cooling.

BY: , Your Business

Q3 2022:

-3.06% – U.S. momentum stocks

-8.90% – Emerging markets small stocks

-10.23% – International profitability stocks

-4.54% – U.S. large stocks                                                      -8.58% – Global high yield bonds

-2.77% & -3.11% – U.S. small (value & profit) stocks          -4.00% – CA municipal bonds

-4.65% – U.S. Hi Relative Profitability                                  -4.08% – Core bonds

YTD 2022:

-26.94% – U.S. momentum stocks

-23.12% – Emerging markets small stocks

-28.31% – International profitability stocks

-23.34% – U.S. large stocks                                                    -27.90% – Global high yield bonds

-16.05% & -26.05% – U.S. small (value & profit) stocks      -14.84% – CA municipal bonds

-21.51% – U.S. Hi Relative Profitability                                -13.77% – Core bonds

Rough year.

As I write this the S&P 500 is trading 5.3% above Friday the 30th’s close, the last day of Q3.

Friday closed 2.21% below the last low for 2022 which was on June 16th.

And from June 16th to August 16th the market gained 17.4%.

With uncertainty comes volatility. In past challenged economic cycles there seemed a period when the bad news just kept coming and the market continually got clobbered to the point where it reasonably couldn’t go any lower.

The negative cycle this year has had a strain of hope underlying market activity. The trading from one day to the next, both up and down, based on the news of the day, has been extreme.

We now know The Fed should have started raising rates (reducing liquidity) maybe a year ago. The word then was that inflation would be transitory because supply chain disruptions caused by pandemic lockdowns would resolve themselves in relatively short order. That was part of the picture but there was also way too much cheap money available leading housing and stock prices to increase in their rate of increase at an unsustainable pace.

Energy prices have also been a problem with production taken offline during the pandemic (takes time to restore), a pro-scarcity mindset adopted by many world leaders (correction on this has begun in many countries) and the Russian invasion of Ukraine.

Despite all of this, unemployment is historically low and there are more jobs available than people to fill them. The almighty American consumer is thus alive and well, on average, albeit starting to get stung by higher interest rates.

Home sales and pricing are starting to show signs of strain. Automakers seem to have finally worked out their supply chain issues but relatively high borrowing costs coupled with delayed supply may help to put a cap on the increase in prices of cars.

More recently, the labor market is showing signs of cooling.

With The Fed being behind on reducing some of our outstanding liquidity they’ve had to employ  a historically short and steep increase in short rates which has made this the worst year for bonds on record (as it relates to the US aggregate index), by a lot.

All that said, and the details aside, we’re still waiting and watching to see the level of persistence with respect to inflation being too high, and how high The Fed will feel they need to go get things moving in the right direction. On the short end they’ve moved the Fed Funds Rate from 0.25% to 3.25% and it seem possible they’ll go to somewhere around 4% before maybe pausing.

If they can see inflation headed in the right direction they may hold near 4% for several months.

Inflation has turned lower by most measures but hasn’t retracted much. Producer prices have come back a bit, which are built in to consumer prices. The limited reduction in the rate of inflation and The Fed’s stated commitment to knock it out ASAP seemed to have been the main cause for the most recent retraction in markets.

We’re at just about the average duration with respect to past challenging economic periods. Should the rate of inflation show signs of waning we may get a pop in stocks and bonds and we know from history we don’t want miss out on what are often short rapid advances from levels that may never be seen again.

For some perspective, when I studied economics as an undergraduate the equilibrium rate of unemployment was thought to be 6% and long run inflation was about 3%. Unemployment is now below 4% and we ran with inflation for many years at about 2% (now The Feds stated target) but current inflation is above 8%.

As always, we appreciate the trust you put in us to manage your investments. We are always available for a conversation should questions arise or you simply desire to connect with us for a few minutes to just say hello.

Sincerely,

Erik S. Wolfers, MBA, CFP®

If you are looking for some financial guidance; whether for a one time financial plan or continuing advice on your investments, we invite you to meet with a First & Main Financial planner for a free consultation. We would be more than happy to sit down with you, assess your situation and review our services to help navigate your financial future.

Thank you,

Erik S. Wolfers, MBA, CFP®

“Best Financial Advisor in Piedmont, CA”

Top Rated Local Financial Advisor / Planner

East Bay Area: Piedmont, CA

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“Best Financial Advisor in Piedmont, CA”

Top Rated Local Financial Advisor / Planner

East Bay Area: Piedmont, CA

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Oakland, CA | Piedmont; Rough Year: September Third-Quarter Update for 2022