Brighter Days Ahead

While the investment markets still face headwinds, we are beginning to see some bright spots of opportunity.

The third quarter is officially in the books, and it was another bumpy ride for investors. After getting off to a strong start, U.S. equities faltered. A hotter-than-expected August Consumer Price Index (CPI) reading dashed hopes for a slowdown or pause from the Federal Reserve on their quantitative tightening program.  As you will recall from our previous Riggs’ Reports, we outlined the extraordinary efforts by the Federal Reserve to provide support and liquidity to the economy during the pandemic shutdown.  Now that the economy is on solid footing, the Federal Reserve needs to undo these measures.  Their primary focus right now is to bring down inflation.  When the August CPI came in stronger than expected, it signaled to the market that the Federal Reserve will need to go higher with their increases to short-term interest rates and continue the process longer than the market hoped. 
 
The Stock Trader’s Almanac says, “September is when leaves and stocks tend to fall, on Wall Street, it’s the worst month of all.” That adage certainly proved true this year as the S&P finished the month down more than 9%, its worst monthly return since March 2020 and its worst September since 2002. The S&P finished the quarter down around 5%, falling below its June low. Through the first three quarters of the year, the S&P shed almost 25%, putting it on pace for its worst year since 2008.
 
The third quarter was also difficult for bond investors. The same factors that hampered stocks – high inflation and a hawkish Federal Reserve – helped push interest rates higher. The 10-year US Treasury yield soared past its June high, reaching nearly 4%, its highest level since 2010. The Bloomberg Barclays US Aggregate Bond Index was down nearly 5% for the quarter, bringing its year-to-date loss to nearly 15%.
 
Commodities also cooled during the third quarter. The S&P GSCI Commodity Index was down more than 10% as the strength of the US dollar, which had had little effect, seemed to finally weigh on commodities prices. The commodity decline was led by WTI crude oil, which was down more than 20%, while industrial and precious metals also declined. While this was certainly not a welcome development for commodities investors, there is a silver lining, as lower commodity prices may mean that inflation is finally beginning to moderate.
 
The strong US dollar also continued to weigh on international stocks as the indices in developed and emerging global markets were each down double digits.
 
As we head into the final stretch of the year, we continue to monitor closely for any shifts in the market landscape. The market is clearly on rocky footing. However, there are bright spots. While down in September, energy continues to be the best-performing sector as supply shortages continue keeping the price of energy higher.  We have also begun to see a breakout in the healthcare sector with a strong pipeline of new drug therapies, a higher demand for mental health services, and a higher demand for medical devices as individuals stop delaying surgeries. We have a higher allocation to energy and healthcare in your portfolios.
 
Another area of burgeoning opportunity is the fixed-income market.  For years, the low-yield environment did not provide a good return to bond investors.  But that is changing.  As inflation moderates and the Federal Reserve raises short-term interest rates, investors will finally be able to lock in a substantial income.  While this opportunity is just emerging, over the next few weeks and months, you will see an increase in allocation to fixed income in your portfolios. 
 
While 2022 has been a difficult year.  Much of the damage is behind us.  From October through the end of the year, we are entering a seasonally and cyclically strong period for equity markets.  We do expect some volatility around the first week in November which will mark the next meeting of the Federal Reserve Board (November 1-2) and the mid-term election (November 8).  But we plan to take advantage of this seasonally strong period and let the portfolios recover some ground lost earlier in the year.  We will then opportunistically move some money out of our high cash position and part of our equity position and toward fixed income as the Federal Reserve breaks inflation and begins to slow its raising of interest rates.  This will allow clients to lock in good income and provide more balance to portfolios.  While periods like 2002, 2008, and 2022 are not easy, they clear the air and provide good opportunities for investors.  After a long year, we are finally seeing signs of brighter days ahead.