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In the third quarter of 2022, the S&P 500’s bear market clocked in at ten months old, the Federal Reserve continued to tighten monetary policy as inflation accelerated, and recession predictions filled news headlines. With stocks and bonds down more than 25% and 15%, respectively, so far this year, 2022 is shaping up to be one of the more painful years in recent memory. But these down markets, although they feel treacherous, present disciplined investors with tremendous opportunities for long-term growth opportunities.
How Did We Get Here?
With the Fed hyper-focused on taming inflation, the markets are keenly following any sign of inflation abating. While there have been reasons for optimism, such as falling shipping prices, climbing inventories, or lower commodity prices—the Fed still faces an uphill battle with consumer prices climbing by nearly 9% year over year, the biggest change since 1981.
Where Do We Go Next?
With the possibility of a recession on everyone’s mind, we monitor two key indicators that have proven to be reliable signals of a looming recession: the treasury yield curve and the ISM manufacturing index. As discussed in our last Markets in a Minute, these indicators point to a growing likelihood that we’ll experience a recession within the next year. And where recession risks abound, market volatility surely follows.
While the Fed is working to tamp down economic activity, some areas remain resilient. For instance, jobs remain plentiful, and the consumer has grown more optimistic. But home prices, which tend to be very sensitive to interest rates, are falling rapidly in some markets, and manufacturing is slowing.
Source: Kestra Investment Management
We will watch for two signs that could suggest we’re nearing the end of this bear market:
What Should Investors Do?
With equity and fixed-income markets already down significantly this year, much of the economic slowing appears priced in. Remember that stock and bond prices today reflect what’s expected in the future. While we expect more economic softening ahead, markets tend to rebound well before the economy does, and sometimes even before we officially know that we’re in recession.
Some strategies that investors may want to consider taking advantage of volatile markets:
Outside the New York Stock Exchange, there’s an iconic statue of a bull to symbolize the long-term upward trend of stocks. But very early in my career, I learned that bear markets play just as much of a role in the history of the stock market. In fact, the bear markets, when prices are depressed, can provide attractive opportunities for the disciplined investor with a dose of courage and a long-term time horizon. For that reason, I’ve long had this statue of a bull and a bear on my desk to remind myself that while stocks don’t always go up, every bear market we’ve experienced so far has eventually been followed by a bull.
Invest wisely and live richly,
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. Does not offer tax or legal advice.