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Q3 2022 Commentary: Discipline Reveals Opportunities for Long-Term Investors

Discipline Reveals Opportunities for Long-Term Investors

» by Jason Print, CFP® and Chad A. Warrick

We believe it is important to understand the underlying circumstances affecting the Markets—and how we are working through them, especially during these times of uncertainty, where the latest headlines could be contributing to our economic outlook.

As if the pain felt in the stock and bond market wasn’t enough to contend with in 2022, Floridians battled one of the worst hurricanes in our lifetimes. We hope that all are safe as we navigate through the challenging recovery process of this devastating storm. We are grateful to our Grand Rapids, Michigan office and to all Summit team members located outside of Florida, who continued to service Summit clients, allowing the Florida team members to focus on the safety of their families. Our hearts go out to those who suffered and are continuing to suffer from the damage brought by Hurricane Ian.

The beginning of the 3rd quarter showed promise, with positive returns in July as corporate profits came in slightly better than expected. Unfortunately, August and September brought a significant reversal. Those much-desired midsummer gains quickly diminished as the Fed increased its efforts to fight inflation. Bond prices continued to fluctuate based on investors’ expectations for future interest rates, inflation, and economic growth. After almost two decades of a significantly low-interest rate environment, the federal funds rate reached levels we hadn’t seen in 15 years. The Federal Reserve has raised short-term rates from zero to 3.25% in just six months, an extraordinary move attempting to combat inflation. So far in 2022, Treasury bonds are down double digits. There have only been two times in the last 90+ years that both stocks and bonds had a negative return in the same calendar year, 1931 and 1969 (bonds were down -2.56% and -5.01%, respectively).

Unless we have a drastic surge in one of those asset classes, 2022 is shaping up to be the third year with both asset classes posting negative returns. Simply put, the stock market carries the weight of uncertainty—particularly as companies navigate headwinds, including continued supply-chain issues, higher employee wages, increased production costs with inflation, and a possible slow-down in demand. All while the Fed tries to navigate a “soft landing.” These factors make for a precarious earnings environment, likely to continue for the next few quarters. We often hear, “have we hit bottom?” While it’s not hard to turn on the news and see many different opinions on this, anybody who tells you they know for sure when the bottom will be, is just not being truthful. What we can do, however, is look to history as a guide for how markets react during inflationary cycles to give us some perspective. The economic data suggests that inflation may be close to peaking. The chart below shows equities have historically done well in the 12 months following peak inflation.

What this means for you, our clients, and what your advisors are doing for you:

Your team at Summit is committed to helping clients navigate this difficult year. We continue to evaluate your portfolio considering the current environment and ongoing challenges. At the beginning of this year, low interest rates and highly appreciated equities limited our investment options. The recent market downturn and swift upturn in bond yields gives us greater flexibility to construct the optimal portfolio in order to achieve both your short-term and long-term goals. We view today’s market environment as an opportunity to rebalance your portfolio, with the understanding that certain holdings are more appealing today than they were a year ago. You can also expect us to revisit your risk tolerance. For some, this year has caused a change in objectives as we adjust to higher costs across the board. We need to ensure your portfolio is positioned to tolerate the overall increase in lifestyle expenses. Our perspective continues to be that of the rational optimist. The fear-anchored headlines do not paint an accurate representation of the opportunities which lie below the surface of market volatility. As your trusted advisors, we will continue to seek investment opportunities that are tailored to your overall financial planning goals. Thank you for your ongoing trust and confidence. It is truly a privilege to serve you and your family.