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Sound Advice: October 12, 2022

More Pain Ahead?

It’s been a difficult year for the investment markets, but tough times have happened before and they will certainly happen again.  Sometimes recoveries are relatively quick and sometimes a hefty dose of patience is required.  No two downdrafts are alike, but the net result is always a rebound to even higher levels than seen before.

One of the most uncomfortable stretches over the last half century took place during the oil embargo days of the early and mid-1970s.  Market valuations fell to the high single digits, a level that was about half the historic average.  For investors, this was one of the great sales of all time.  Those who had the courage to get aboard reaped huge rewards.

More recent pullbacks of note took place during the dot.com days of the turn of the millennium and the banking crisis of 2008-9.  The former period was marked by what appeared to be investors’ absolute indifference to longstanding measures of reasonable value.  If a company had an interesting story, shares were gobbled up and soared.  Underlying profits were of no importance.  Overall market valuations skyrocketed to more than double the historical average.  Not surprisingly, this led to a bloodbath on Wall Street and the leading indicators slid 40% over three years, then needed another five years to break even.

Unfortunately, that was just in time for the banking crisis of 2008-9, which dropped the stock market averages almost 42%.  That was the end of the lost decade for stocks, but what followed was one of the strongest 10-year gains in history, with average annual returns nearing 20%.

Where are we now? Stocks began the year on the skids and despite a few attempts at stabilizing, the situation remains rocky.  Fingers can be pointed in numerous directions, but it really comes down to excessive inflation and the Federal Reserve’s efforts to bring prices under control by raising interest rates.  The problem for the investment markets is straightforward: when rates go up, stocks tend to go down.

Although it would be comforting to believe that these efforts will not have unpleasant side effects on the economy, history tells us that the odds of what is known as a soft landing are not very good. More likely than not, credit costs will be tightened too far and then, of course, there will be a need for easing to get business back on an even keel.

That prospect may well hold good news for investors.  Though stocks may continue in the doldrums while things are getting sorted out, valuations will move lower, making prices more attractive.  The prospective path of interest rates suggests the probability of a peak, perhaps by next summer.  A period of easing will follow, and bonds, after a difficult stretch caused by rising rates, may be worth considering both for current income and appreciation as rates are lowered.

There will be better times to come, but the near-term lookout remains cloudy.

N. Russell Wayne, CFPÒ


www.soundasset.com

 

Any questions?  Please contact me at nrwayne@soundasset.com

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