As you know, we pride ourselves on being a conservative investment firm, and we spend a great deal of time on risk management. Its times like this we’re reminded why.

I wanted to take this opportunity to communicate the current economic/investment climate we find ourselves in and also discuss our outlook going forward. First – just a quick summary of where we are. 2022 has been a roller coaster for the investment markets. This has been caused primarily by three different issues we are dealing with. First, Inflation. As many of you can attest, this last year has seen significant price increases in just about every category of goods and services. Second, the world is still struggling to shrug off the impacts of the pandemic. While consumers have continued to spend this year, our supply chain continues to be disrupted primarily due to China and their near-zero Covid policies. The third issue is of course the tragic situation in Ukraine which has threatened Europe and further caused supply chain disruptions of food and energy. 

Ok, so what can be done about all these issues we are dealing with? The primary thing is to try to slow the economy down and put downward pressure on prices. This is what the Federal Reserve, the Fed as its called, has been trying to do by raising interest rates. Unfortunately, the Fed has not seen as much impact on price stability as they would have liked through this year and with inflation near 40 year highs – the Fed has become dedicated to their tightening cycle and has grown increasingly aggressive, pushing rates to levels not seen in over a decade.

The question on everyone’s mind is whether the Fed will be able to engineer a “soft landing” for the economy, meaning slowing things down enough to cool inflation, but without pushing the economy into a deep recession. This uncertainty has led to sharp sell-offs in both equity and bond markets. And while we’ve seen larger sell-offs in equity markets, the problem is compounded by losses in bonds as well. This means that traditional diversification strategies – such as a 60/40 stock/bond portfolio - aren’t offering much of a haven.

However, for longer-term investors, it is important to assess where we stand in light of the sell-off. With the sell-off in markets, equity valuations are now below their long-term averages. With the increase in rates, bonds now provide a reasonable income stream in addition to protection. Both are much more appealing from a long-term perspective than they’ve been for some time, and in the instance of bonds, over a decade.

There are plenty of things that could go wrong. With markets approaching new lows, many of these are likely already priced in. The market seems to be forgetting that there are things that could go right, and these are likely not priced in.

Volatility and declines are unsettling and emotionally draining, they do reset the market environment and provide opportunities for future, longer lasting gains. As always, a diversified portfolio and long-term view still offer the best route to reach financial goals.

We strive to keep you informed and help you stay on track toward your long-term financial goals. If you have questions, please don’t hesitate to contact our office.

-Wesley W. Bean, CFA^® and your team at McCarthy & Cox