Stocks continued to falter in the third quarter. Large domestic companies, as measured by the Standard & Poor’s 500, fell 5.3%. The Russell 2000, reflecting smaller domestic stocks, dropped 2.5%. The Nasdaq Composite, heavily weighted in tech firms, was off 4.1% while foreign shares, generally speaking, declined with the Dow Jones World Index (ex US) down 10.4%.
Investor sentiment brightened as the quarter began, driving the demand for equities and a robust summer rally. Many were optimistic that inflation had peaked, and the medicine of monetary tightening could be reduced in the not-too-distant future. Some even suggested that after another fed funds rate hike or two, the Fed may reverse course and begin easing rates in 2023. These hopes were dashed by subsequent economic and inflation data. Comments by Chairman Powell at the Jackson Hole Economic Symposium made clear that quantitative tightening in the form of balance sheet reduction and fed rate hikes would continue until the job was convincingly accomplished. Powell, along with other Fed members, dropped any notion of a “soft landing”. Rather, their position was unequivocal; the urgency to return inflation to a 2% target rate outweighed the potential pains of economic contraction, unemployment and recession. Investor sentiment turned negative and selling pressure ensued. By quarter’s end, declines in the major stock indices surpassed the lowest levels of mid-June.
So, is there a silver lining to any of this? Powell frequently invokes the actions of past fed chair Paul Volker and his aggressive approach to combatting nasty inflation in the 1980s. It bears noting that the outcome of those efforts was a tame sustained inflationary environment and a prolonged bull market. While today’s challenges are not identical to those in the 70’s and 80’s, they do rhyme. We should recognize the monetary medicine of aggressive tightening has a history of success. It is reasonable to maintain confidence that these actions, coupled with responsible fiscal policy, will eventually curtail the inflation threat and return us to an overall sound economic condition and general prosperity. In the meantime, our recommendation to investors is to stick to the fundamental basics of proven portfolio management. The successful long-term investor resists the occasional temptation to make radical changes to one’s thoughtfully constructed long-term portfolio.
In these times of volatility and uncertainty, it is helpful to remain close to your trusted fiduciary advisor. As such, we welcome your calls, texts, emails, etc. And, as always, we adhere to our discipline of strategic asset allocation and style diversification; a strategy designed to mitigate overall portfolio volatility and enhance long-term returns.