Third Quarter 2022
Volatility in the global financial markets continued through the third quarter of 2022. Supply chain problems and employee shortages created by the COVID pandemic, along with massive government spending, has produced a surge in inflation that has not been seen in decades. To combat this inflation, the Federal Reserve remains committed to aggressively increasing interest rates.
We have been writing for over a year about how we expected to see higher rates in 2022, and in response, were holding higher cash balances. At this time last year, the two-year US Treasury was yielding one-third of one percent as the Federal Reserve continued a near zero interest rate policy. Fast forward to today, and the two-year Treasury is yielding over 4.0%. Even money market funds are currently yielding over 2.5%. This is a massive increase in rates in a noticeably short time, but we believe it is a signal that alternatives to stocks may finally be emerging in fixed income.
In response to the higher rates, the stock market has been going lower as investors reprice assets and demand greater compensation for the risks assumed. As the stock market declines, it is important to take stock in our investment process which is to focus on high
quality companies that will be leaders in the future. We do not concentrate our investments in pooled vehicles such as mutual funds. We buy individual stocks and bonds of the companies themselves. We refrain from trying to guess what the “market” will do but concentrate on identifying the stocks of well-run companies at attractive prices. We believe the 2022 sell-off will pave the way for higher and durable returns in the future once markets reset.
We refrain from trying to guess what the “market” will do but concentrate on identifying the stocks of well-run companies at attractive prices. We believe the 2022 sell-off will pave the way for higher and durable returns in the future once markets reset.
In our 41-year history as a firm, we have helped hundreds of clients navigate their portfolios through numerous market cycles. Recessions and market bottoms, while part of the economic cycle, are extremely hard to predict and only confirmed in hindsight. It is our steadfast belief, that in times of market and economic turmoil, investors should focus on a long-term strategy. Unfortunately, economic cycles do not turn overnight. We urge patience, which we know and understand is exceedingly difficult to do consistently. But we will not be swayed from our time-tested core mission of creating a diversified, high-quality portfolio for our clients. A mission that has served us well for more than four decades and one which we expect to continue in the future.
However, sticking to a long-term strategy does not mean in times of market turmoil we do nothing. We continue to review asset allocations to make sure each portfolio has the correct balance of stocks and bonds. This includes making sure that we can meet upcoming cash needs without selling a substantial amount of stock at depressed prices. Next, we review the capital gains in taxable accounts to take advantage of any tax losses that can improve the after-tax return. Third, we continually monitor the stocks we own to make sure that the companies are being run in the manner we expect. And finally, we look for new opportunities so that we can put additional capital to work over the long term.
We understand that market declines are not enjoyable, but they are unfortunately a part of the investing process and should be expected. Please call us with any questions so that we can discuss your personal concerns or expand on our views and outlook.
Connect your finances to what matters most
This article can provide only a general understanding of sometimes difficult financial concepts. For for a more thorough explanation, or if you have questions about your own portfolio, please feel free to reach out to us here at McRae at (973) 387-1080.