Your investments may be the scariest thing you see this Halloween. It’s certainly been a horror show so far, with stocks, bonds, and real estate all declining dramatically this year. Rarely do the various markets decline in such a concerted fashion, and for many investors the results are the worst since the 2008 mortgage crisis.
Thankfully, we may be getting some relief soon. The Federal Reserve has been extremely transparent regarding their plans for interest rates. Based on their most recent statements, it sounds like we’re in for one more big increase in November, with a smaller rate increase in December, and just one quarter-point increase in 2023, with short-term rates settling around 4.5%. The Fed seems likely to pause at that point to evaluate the impact the higher rates are having on inflation and the economy.
Such a pause should at least stabilize the bond market, if not stocks to some extent. However, we are not necessarily out of the woods. If inflation is still running high next year, additional rate increases may be necessary. That is not priced into the current market and would almost certainly lead to continued volatility and probably additional losses. Even if the Fed holds interest rates steady next year, the impact from the 2022 increases will continue reverberating through the economy and it can still tip into recession easily enough. If it does, there will likely be additional downside for stocks, though just how much depends on how deep the resulting recession is.
Most economists are calling for a shallow recession next year. That said, economists don’t necessarily have a great track record of accurately predicting such things, and unsurprisingly, estimates are all over the place. Some are predicting a deeper recession. As painful as that could be, it would almost certainly solve the current inflation problem. A shallower recession may avoid some of that acute pain in the short term in exchange for a potentially longer period of stagnation, especially if inflation remains above average at the same time.
Whatever ends up happening, we may get some relief in stock prices in the coming months, even if only temporarily, based on seasonal and political factors. While past performance never guarantees future results, the fourth quarter tends to be the strongest for the stock market, on average. Stocks have also performed best, on average, when the government is divided, and we may have just such a situation after the midterm elections. Interestingly, according to Larry Adam, the Chief Investment Officer at Raymond James, “in the last 19 midterm elections, the [U.S. stock index] has been positive every time 12 months after the elections”. There are other statistical tailwinds as well. For example, the stock market has performed best, on average, in the third year of a president’s term.
Historically, of course, investors in the U.S. have been well rewarded for sticking with their long-term plans and riding out periods of market stress. While we don’t know exactly what’s coming or how long this downturn will last, we have no reason to assume that, in the end, it will be any different this time.
The information above represents the opinion of financial advisor Travis Rus, and is not necessarily that of RJFS or Raymond James. It is not a complete summary of all available data necessary for making an investment decision and does not constitute a recommendation, nor is it a complete description of the securities, markets, or developments referred to herein. Opinions are subject to change without notice. Information has been obtained from sources considered reliable, but we cannot guarantee that it is accurate or complete. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
