October is now behind us, and it has delivered on its track record as a historically favorable month for stocks, offering some relief as major equity indices rose for the month.
The downside pressure on equities had gotten a bit overdone after investor pessimism during September reached lows not witnessed in quite a few years. From a contrarian perspective, extreme pessimism can often be followed by a bear market bounce. These rallies serve as a reminder not to react too quickly to near-term market developments. Gains in October helped deliver that message again, though they have only slightly offset this year’s losses during what has been a very tough environment for stock and bond markets.
While it may be easy to consider October’s market rally temporary, there are some potentially sustainable developments that may continue to provide a slight tailwind. First, markets may have begun to look beyond current inflation pressures and the Federal Reserve’s monetary policy tightening cycle toward potentially better conditions in 2023. Remember, the market is always forward-looking, and asset prices tend to reflect what may happen months or quarters ahead. If investors continue to look ahead to better inflation readings (inflation has been coming down after peaking in June) and an eventual end to the Fed’s aggressive rate hikes, asset prices may begin to more regularly reflect some budding optimism.
The Fed may have been slow to attack inflation, but its policies are working. Jobs and housing markets have been cooling, two inflation variables the Fed is seeking to influence. Some recent softening in economic data, coupled with signals from the bond market, may be indicating that Fed policymakers’ concerted inflation fight may be closer to the end than the beginning. We will continue to pay close attention to potential subtle directional shifts in Fed policy expectations, which will be instrumental in shaping future market direction as the trajectory of interest rate increases decline.
We are very aware that drawing elements of optimism from a stubbornly poor equity and bond market trend is no easy task. However, times like September when pessimism is at an extreme and emotions are running high, is often when investors need to adhere to a clear-eyed view of market history where market downturns have always been followed by market recoveries.
To this point, our friends at First Trust Portfolios put together a chart of the S&P 500 Index dating back to July of 1953, which details the largest stock market pullbacks during recessionary periods followed by the Index’s subsequent 1, 3 and 5-year return performance (please click on the gold hyper link below to view the chart). As long-term investors, this chart should provide some level of comfort and offer more evidence that being patient and staying the course does pay off.
Opinicus/First Trust – Recession and Recoveries
As we look ahead, the months of November and December have historically been the best two months of the year for stock market gains. This year’s calendar is complicated by political implications of the midterm elections, but markets historically have responded positively to the opportunity for course correction that mid-term elections provide. We should also have slowing corporate earnings growth and greater economic uncertainty to contend with, some formidable seas to navigate.
Still, as we survey what are better equity valuations, long-awaited income opportunities in the bond market, and a likely less-antagonistic Fed in 2023, there may be emerging reasons to believe that the next year may be more constructive than the last.
We wish you and your family a great Friday evening, and an enjoyable weekend.
As always, please reach out to us with any questions or comments you may have regarding your specific situation.
Jaran C. Day, Chief Investment Officer
Griffin Dalrymple, CFP®, Chief Strategy Officer