Posted: October 19, 2022 | by: Thomas F. McKeon, CFA
In this issue: Review & Outlook 3Q-2022, Recession or No?, Is it Inflation or Corporate Gouging?
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Markets across the board continued to be under pressure in 3Q-2022 as the Federal Reserve continued to raise interest rates to cool the economy and constrain inflation. Mortgage rates above 7.0% have not been this high since 2008. Of course, higher rates cause the present values of all assets to decline...and that’s what they are doing...declining.
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Whether the aggressive rate hikes by the Federal Reserve in their effort to stem inflation ultimately slow the economy enough to cause a recession remains to be seen.
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Is it Inflation or Corporate Gouging?
It should be noted that the September jobs report provided no evidence that the economy is suffering from a nineteen-seventies-style wage-price spiral, which is the inflation hawks’ nightmare scenario.
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U.S. Stock Market has Over-Corrected to Downside
In our 2022 Market Outlook we noted that the U.S. stock market was overvalued coming into the year. The four headwinds we identified have been joined by additional new headwinds, including the appreciation of the U.S. dollar and expectations that Europe is entering a recession.
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Valuations drive forward returns. Valuations are the single metric that reliably and strongly correlate (inversely) to forward returns. Lower valuations drive higher forward returns and higher valuations deliver lower forward returns. The exhibit above from Morningstar reveals a deeply discounted equity market. While short-term declines are unsettling, superior returns have historically resulted from undervalued markets. Investors with cash should be spending aggressively. Fully invested investors should hold fast. If history informs--and it does--forward returns will be above average.
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The point of these market chart and return exhibits is to help investors hold their nerve during market selloffs. Sure, market declines are unpleasant. And the news-flow has never been more noisy, conflicting or histrionic. But every down-tick in the markets make for better and better future returns.
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Hedge Fund Managers Paid for Stockpicking Genius Aren’t Showing Much of It
The traditional strategy of mixing long and short equity bets hasn’t provided the bear market buffer that clients hoped for.
From BloombergBusiness Week
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The partnership remains fully invested and very close to our target allocation of 70% equity investments and 30% debt investments. We have tweaked our portfolio slightly to improve the monthly income we receive from all sources.
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Metallica with Miley Cyrus on the Howard Stern Show from 2021 performing their iconic and haunting anthem “Nothing Else Matters.”
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