In March of 2022, the Fed made its first rate hike in over three years. Since then, rates have increased in each Fed meeting through 2022, and they look to keep doing so for at least the next few meetings. With stubborn inflation and strong jobs, the Fed remains vigilant in tightening monetary policy, weakening demand.
The labor market remains hot:
Back in your Economics 101 class, you probably learned that the Fed's dual mandate is to "foster economic conditions that achieve both stable prices and maximum sustainable employment." That puts them in a bad spot today, where inflation is running high, and employment is running hotter than we'd reasonably expect is sustainable. In September, the unemployment rate fell to 3.5% as the economy added another 263,000 jobs. As odd as it may seem, the good news is bad news for the markets nowadays. A strong jobs report makes it more likely the Fed will keep taking action to slow demand. And in fact, the Dow Jones lost 600 points, and Nasdaq dropped 3% the day that report came out.
A persistent post-pandemic problem for companies has been trying to find workers. The number of job openings compared to the number has far outpaced the number of available workers. We may be starting to see that change, though. Job openings, while still high, have decidedly fallen recently, dropping about 10% between July and August. If openings keep falling, the unemployment rate will eventually tick up, reaching a more sustainable pace. It's early yet, but we may be starting to see the shift.
Investors are pessimistic:
The late Sir John Templeton famously said, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." Believe it or not, some folks measure how investors feel and track it historically, and as we should expect after reading Templeton's quote, the measure acts a bit contrarian. When investors feel down and negative, it's usually a good time to buy.
The American Association of Individual Investors (AAII) is one such group that has been measuring sentiment for a while, since 1988. Right now, investor sentiment is about as low as it's ever been, which on the whole, is positive for the markets. Despite the worry among investors, equity allocations in investor portfolios remain higher than previous market bottoms, though it is on a downward trend. In other words, even though investors are worried at a historically elevated number, those feelings have yet to cause enough of them to sell yet to get to a point where we are typically at the bottom. Investors are certainly no longer euphoric, and while the next bull market may not have been born yet, we are getting there from a sentiment perspective.
- The S&P 500 is down 20.96% YTD
- International Indexes (MSCI EAFE) is down 25.15% YTD
- Bonds (Barclays Aggregate Bond) are down 15.57% YTD
Putting it together:
Warren Buffett once said, "the only value of stock forecasters is to make fortune tellers look good." Unfortunately, it's near impossible to pinpoint a market bottom, so we won't try. There are signs, though, that the Fed's actions are starting to have impacts, and hopefully, that means we are getting there.
This likely is not the first time you've experienced a market downturn (we had a significant market drop just two years ago), and it likely won't be the last. Sticking with the theme of legendary investor quotes, Nobel prize-winning economist Milton Friedman said, "There's no such thing as a free lunch" (and wrote a book titled as such). The theme is that there's always a price to pay for everything. In investing, the cost of those long-term returns we love is volatility in the short run. We are obviously experiencing one of those icky periods now. Remember that the long-term trajectory of the market has historically been up. Remember also that your financial planning work considered good and bad time periods, with the idea that when we hit bad periods, we stay the course. That was the story last year when the market was good, and it remains the story today when the market has been bad. If you have questions or would like to chat, shoot us a message.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.