October 2022 Market Event Follow-Up

Thank you to all who attended our market update, both in person and on zoom.  We had quite a few people ask for a recording but unfortunately, we can’t record it.  Please see some of the slides we covered, along with a brief summary of our discussion.


If you have questions or want to meet and discuss, please don’t hesitate to reach out.


Why are my accounts down so much this year?:

  • Worst ever start to the year for bondsworst ever! And by a long shot by almost 4X as much 9 months into the year (bonds were down a negative 15% through 9/30/22 compared to the worst previous first 9 month loss of negative 3.9% in 1981). The previous largest decline in bonds in a calendar year has been (negative 3%) in 1994 so we’ll see how bonds play out from now until year-end but most likely will set records.
  • 4th worst start to the year for stocks behind… 1931, 1974, and 2002.
  • In 2022 93% of asset classes have lost money (94% were down in 2008)… again, with bonds down a record amount makes it feel even worse.
  • Several of the asset classes that are doing well in 2022 have been flat to negative for almost 15 years (Cash, Commodities, Energy, Utilities)


Discussion points:

  • Financial Crisis of 2008: Doesn’t “feel” like we are in a 2008 moment, companies & individuals are better positioned than they were in 2007, but of course things can change.  (We have heard Pete and other long-time market guru’s not worried as much as they were in 2008)
  • 0% rates: Rates went to 0% in 2008 and stayed there for 10 years and were lowered again to 0% during Covid 2020 when the global economy was forced to shut down.
  • “TINA” was the result: There Is No Alternative.  This was a common theme over the last few years as there was no real alternative to stocks as rates were 0% and cash from the bank was paying nothing and with low and rising interest rates we are well aware in 20022 how this affects bond prices and how they have lost money.
  • 2008 “bailouts”: In 2008, the FED pumped $700 BILLION into the economy during the financial crisis.
  • 2020 “Covid relief”: In 2020, they pumped $6 TRILLION into the economy (more than 9 TIMES the amount of the 2008 financial crisis), while keeping the economy shut down for some time. This was more money than what the USA spent on WWII in it’s entirety.
  • While this certainly bolstered the economy and kept spending running hot for the past 2 years, it also significantly impacted the money supply & inflation and we are feeling the effects today and most likely will continue to do so in the future. 
  • Fiscal responsibility matters:  Just like managing your spending and debt with your household, it matters to the health of our nation as well and over the years, our politicians (on both sides) and leaders and the FED have spent a lot of money and continue to spend our tax dollars.
  • This has increased the US Debt dramatically… If the national debt hits $35 TRILLION in 2023, at a 6% interest rate, annual interest payments on the National Debt would exceed national defense, welfare, and education spending COMBINED.  While this is certainly very concerning, it is worth noting that although the debt is much higher now, when adjusted for inflation, the cost to service the debt isn’t much higher than it was in the early 1980’s.
  • Inflation: Still at 40 year highs but showing signs of peaking and potentially rolling over some.  We saw very little inflation for the last decade or so (1-2%), we will most likely see higher inflation (3-5%) in the coming 3-5 years but hopefully off the recent highs of 9%.


Potential Headwinds:

  • The FED: While rates have been low and the FED accommodating, they have increased interest rates at a historic pace to try and tamper inflation. 
  • Recession: If they continue raising rates at this pace, it will most likely push the US into a recession.  Many predict a recession in early 2023 or by the end of 2023, early 2024. Of course, it is possible they navigate a “soft landing” with rates and avoid a recession, it is looking more likely a recession is coming.
  • Inflation: Still at 40 year highs but showing signs of peaking and potentially rolling over some.  We saw very little inflation for the last decade or so (1-2%), we will most likely see higher inflation (3-5%) in the coming 3-5 years but hopefully off the recent highs of 9%.  Keep in mind that “demand destruction” is what the FED is trying to do to try and bring down prices.
  • Undivided Party control: Markets typically do better with divided government.  If the Democrats keep control of all houses, the likelihood of higher taxes and more spending is a risk to an already high inflationary environment and fragile economy / consumer.


Potential Opportunities / Bright spots:

  • Yield is back: While money market’s haven’t paid any real interest in the last 14 years, now you can get some yield / income on your safe money.
  • Interest rates coming back down?: We believe the US doesn’t want to keep interest rates too high due to the high cost to service the outstanding debt.  Plus, we know the FED’s playbook and if their rate increase pushes us into a recession, they will most likely then lower rates in the future.  Most fixed income managers see interest rates back down in the 2.5% range (currently at 4%) by the end of 2023.  This is a more normal and healthy range (than 0%) and should be a better environment for both stocks and bonds.
  • Bonds: Volatility can create opportunity and now that we have seen historic rate increases and volatility in bonds, many of them are trading at a discount now with a nice yield (4% for ultra-short duration, 6% for short duration, 7-8% for intermediate, 9% for high yield bonds *yields are fluctuating quickly).  While we talked about the potential danger in owning bonds the last few years, AT THIS POINT going forward, there may be some opportunity to get a nice yield and potential price appreciation if rates come down.
  • Stocks: Overall, valuations are lower than just 10 months ago. There are still good companies that will generate nice earnings and potential attractive returns in the coming years.  Plus, when we rally from the bottom, equities will rally hard.  What got us into this hole, will get us out of the hole.
  • “Worst ever”: With bonds having their worst year ever and stocks experiencing their 4th worst start, historically and statistically speaking, the next 12 months should see attractive returns. It’s just tough to think about that when you are in the thick of it.
  • High growth / innovation:  Many of these high flying stocks have been hit extremely hard, (down 50% to 75%) or more and yet still have very nice earnings growth and potential.  When things begin to turn around, these companies could do very well.
  • Small caps: Have been hit very hard and suffering even more due to higher inflation / costs and are currently trading at 20 year low valuations.  When things begin to turn around, these companies could do well.
  • International / Emerging markets: The USA has been THE place to be the last 14 years when compared to overseas, causing valuations to be much lower than the US.  Currently, other parts of the world (Europe, China) are most likely already in a recession making it tough to want to put money to work there at this point but potentially in the next 6 months or so. Plus, with the surge in the US dollar, this has affected Int’l even more with the currency exchange.  When the dollar begins to weaken, this should help Int’l and EM stocks, along with them coming out of the recession.  Many people forget that the 10 year return in the US was pretty bleak from 2000-2010 while International had a better run during this timeframe.
  • Stocks lead in and out: 10 months ago, the economy was humming along but stocks turned south.  Fast forward to today, the market has taken a beaten but the economy hasn’t yet, although the data is shifting and in many areas quickly.  On average, the market will bottom and lead out of a recession 6-9 months before things appear to be getting better.
  • Cash on the sidelines / Wealth of companies and consumers: Although financial assets are suppressed in 2022, companies and consumers still have an extreme amount of wealth, much more than during previous recessionary periods.  Remember the $6 trillion dollar helicopter drop of money into the system!
  • Where are the potential opportunities on the other side of this? We are starting to hear these questions from fund managers and people in the industry.  This doesn’t mean we are out of the woods yet but a good sign of managers trying to use this volatility to position themselves on the other side.


So while there will most likely be ample opportunities out there as a result of the drop we have had, we don’t want to seem as though all is rosy going forward from here either. Challenges still abound and pull against the opportunities in a tug of war looking ahead. If/when we go into a recession, this could potentially push the market back to the lows and maybe farther before it goes higher. Again, the way up from here will look pretty similar to what we are as we rode it down, we just have to make sure you are in the game when that happens.


Jeremy & Eric