Hope ran out halfway. From July 1 to mid-August, the US stock market slowly recovered the setbacks accumulated since April, and the most optimistic thought that everything lost in the year could be recovered. But during the second half of the quarter the days were counted for bad news, and not only what was gained was lost but the annual lows were deepened .
Thus, between June 30 and September 30, 2022, the S&P 500 posted a 5.28% decline , the Nasdaq Composite lost 4.11%, and the Dow Jones fell an almost diabolical 6.66%. In this way, the first two mark their worst quarterly streak since the fateful 2008, and the Dow marks its worst record in seven years. A persistent inflation that has forced the Federal Reserve to continue tightening its monetary policy, as well as the uncertainty caused by the Russian invasion of Ukraine and the rise of the dollar have been some of the economic protagonists of a quarter to forget.
Given this situation, Morningstar points out three lessons to be learned from the chaotic situation that has been experienced in the last three months.
Don’t go against the Federal Reserve
“Fed liquidity is like the tide for the market,” Steve Sosnick, chief strategist at Interactive Brokers, graphically explains. Sosnick comments that if liquidity increases, that is, with expansionary monetary policies, stocks rise. But the rise in interest rates in recent months has hindered the movement of capital and that pulls the market down. Going against the tide of the Fed is as absurd as fighting the tide, Sosnick metaphorically argues.
In recent weeks, the Federal Reserve has been strengthening its commitment to return inflation to levels closer to its 2% target, especially given that the labor market continues to show signs of strength. Inflation in the US stood at 8.3% in August, so there is still a long way to go. The latest ‘dot plot’ released by the central bank places as the most likely option that interest rates end the year between 4 and 4.25% , and that they will continue to rise during the first months of 2023.
Be disillusioned: there will be no ‘V’ bounce
Yes, it was the case with the market crashes at the end of 2018 and in the months after the worst moments of the coronavirus pandemic in 2020. US indices fell sharply and recovered almost as quickly. But this will not be the case: the set of conditions surrounding the economy will not be resolved as quickly as they have been complicated.
Investors who remain confident that the Fed will slow down rate hikes in the face of a stock market crash should review the quarter just behind us. The main selectives have been falling almost continuously since mid-August – the S&P 500 has closed six of the last seven weeks in the red – and the central bank has not shaken its pulse to continue raising the price of money. So far this year, the selective has lost more than a quarter of its value, and yet the Fed has raised rates from 0.25% to the current 3%.
It is one of the classics of the markets. Given the poor prospects in the short term, it may not seem reasonable to buy – “when there is no money flowing into the market, buying on dips can be a trap,” says Sosnick – but it is not advisable to sell either. Most equity assets are suffering setbacks , while investment-grade sovereign bonds are failing to combat inflation and keeping money in cash only means losing purchasing power in a scenario like the current one.
Faced with this complicated situation, it is advisable to return to the basics and diversify the portfolio with different types of assets, sectors and regions, to compensate for falls and, in turn, remain invested for when the losing streak passes. Taking advantage of firms with good fundamentals and having a long-term strategy are two solid fundamentals given the volatility of the large stock markets.
For investors looking into the distant future, Research Affiliates’ Head of Multi-Asset Strategies Investment Jim Masturzo recommends considering buying US bonds now that the benchmark – 10-year debt – is in the 4 zone. %.