As a volatile September ended, the S&P 500 Index continued its downward trajectory, closing the month with a loss of over 9%. September’s decline was driven by the markets processing what higher rates could mean for financial markets rather than new data indicating additional risks that lie ahead. While corporate earnings remain stable relative to a year ago, all attention is on how aggressive the Federal Reserve remains in combating inflation.
The Fed’s goal with raising interest rates is to control inflation, hoping to bring it back to its long-term goal of about 2%. Over the summer, the markets were optimistic that Fed Chair Jerome Powell could deliver a soft-landing, meaning a continuation of economic growth while decreasing inflation. Since the end of August, this optimism has waned.
The Fed's recent communications have led investors to expect higher rates, no matter how financial markets react, and even alluded to accepting a recession to bring inflation to a reasonable level.
Increasing rates by the Fed have negatively impacted on both equity and bond markets, causing a new dynamic for investors’ portfolios. For much of the past forty years, investors have become accustomed to bonds acting as their protection during challenging equity markets. 2022 has presented a new challenge as the year-to-date drawdown for the S&P 500 Index is about 25%. Meanwhile, bonds also contributed to declines of their own with a 15% drop. This is the first time since 1994 both bonds and stocks are trading in negative territory for a calendar year. However, in 1994, the decrease was not to such a significant degree for either asset class.
The top-of-mind question for many is, what can we do? Unfortunately, the best action is no action. For investors still working and contributing to their 401k, remember you are investing at a lower price at each pay period. Even those withdrawing from their portfolio can weather this environment. Nearer-term cash needs are already out of the market and not suffering the losses other parts of the portfolio experienced. Plus, higher yields mean the same portfolio is earning more income to meet spending needs. While 2022 is not an optimal investing environment, patience remains a key tenant. No one knows when markets will bottom. However, maintaining a long-term, diversified allocation continues to be the best plan to meet financial goals.
Author: Joe Clark, CFA | Research Team | Allegheny Financial Group | October 2022
The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
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