Portfolio Research Director, Kevin E. Donovan, CFA, and CJM President, Tracey A. Baker, CFP®, discuss recent major headlines and what happened in markets during the third quarter of 2022.
Tracey:
Hi, I’m Tracey Baker with CJM Wealth Advisers and I’m here with our portfolio research director Kevin Donovan. Kevin, maybe you could tell us a little bit about what’s going on in the markets. It has been a challenging year so far and the third quarter of 2022 didn’t bring us much relief. What can we expect going forward?
Kevin:
Yeah, unfortunately the third quarter was not the turning point we all thought it was going to be. Let’s jump in right away and look at the chart of what happened during the quarter in the S&P 500 and in the bond index.
So in the beginning of the quarter, people were pretty optimistic. We were coming off of a market low just before the quarter started and the feeling in the market was that we were going to start to see better inflation numbers. Maybe not a lower ring of inflation, but at least a plateau. But you can see we hit the peak. The S&P 500 was up about 14% exactly at the midpoint of the quarter on August 15th and 16th. But then that’s when the inflation numbers came out, which were higher than expected and the Fed raised its interest rates by three quarters of a percentage point again after doing it the first time earlier. Then they did another one in September and the markets really sold up after that.
You can see the blue line there is the S&P 500. It stayed positive for most of the quarter, but it turned negative in the last two weeks and ended up down 5% for the year. The bond index in the orange line was up as high as 3% in the beginning of August, but when the Fed started raising interest rates so aggressively, bond yields turned sharply higher and higher bond yields mean lower bond prices. By the end of the quarter, the bond index was also down about 5%. So not a great quarter all in all.
If you look at the next chart, the year end date chart, you can see the S&P 500 is down over 24% and the bond index is down over 14%. Now, when our clients get their reports, they’re obviously going to see negative numbers. There’s really no place to hide. But since we have a mixture diversified portfolio, that’s a mixture of stocks and bonds, the numbers you’ll see for your returns for the year will be negative numbers in between those two numbers, in between 14 and 24%. So not a great quarter.
Tracey:
No, not a great quarter for sure. So Kevin, maybe you have the secret for what’s going to turn the market around, the economy around. What can we expect here in the last quarter of the year?
Kevin:
Yeah, well, the good thing for financial markets is that we don’t necessarily have to see a booming economy for the stock market to do well. Right now we’re at pretty much peak pessimism. I would hope that we’re at peak pessimism. Sometimes all it takes is just a change in how people perceive the future. So if we don’t things are going to get any worse, in the past, that’s been the time when the stock market starts to turn around and move higher.
The first couple days of the fourth quarter, just the past two days that we’ve seen when we’re recording this, we’ve seen a big move upwards in the market. The feeling is that maybe we’ve reached that point. Now it’s very early to say that. I’m not going to make any calls like that, but it’s usually the change in feeling about what direction we’re headed in or if things are going to continue to get worse or start to get a little bit better. So that’s what we’re looking for and hoping for in the fourth quarter to kind of make these numbers a little less negative as we head into the end of the year.
Tracey:
So history tells us things do turn around quickly when they turn around. So we want to be invested for the opportunity if we’ve participated in the downturn. Is that what I’m hearing you say?
Kevin:
Yes. Bear markets don’t last forever.
Tracey:
There you go.
Kevin:
When we’re living through them, they are painful. We understand that.
Tracey:
We do.
Kevin:
We know how you’re feeling right now, but they don’t last forever and this one will end just like the other ones have ended. Just the timing is unsure.
Tracey:
There you go. Well, thank you so much, Kevin, for your thoughts and we want to thank our listeners for participating and listening to our thoughts as we wrap up this kind of just difficult third quarter and look for it. Want to wish everybody a happy holiday season and we’ll see you again next year. Thanks so much.
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