“You make most of your money in a bear market; you just don’t realize it at the time.” – Shelby Davis 

We can officially say we have entered a bear market, as all three major indexes are trading more than 20% lower this year. In the third quarter, the market failed to overcome its downward trend, leading equities sharply lower for the third straight quarter. US equities rallied in July with the S&P up the most since November 2020, finishing the month up over 9%. There were pockets of traction behind the peak inflation and peak Fed narratives that provided a boost, as was evidenced by the selloff in commodities and a decline in medium- and longer-term inflation expectations. However, this reprieve was temporary as Powell and the Fed quickly deflated the optimistic speculation, summed up by his comments that households and businesses should “expect some pain” as the Fed holds fast to its price stabilization plan. He once again made it very clear that the Fed would do whatever it takes to lower inflation, and that includes continuing to raise rates and keep rates higher for longer. To make matters worse, we also experienced hotter than expected inflation readings in both August and September, which caused the Fed to continue its hawkish rhetoric. Historically, September is the worst trading month of the year, and this year proved no different; the week of September 19 saw equities fall over 6.25% as investors grappled with recession fears after FedEx announced significant negative earnings expectations for 2023. This sent equities plunging through the end of the quarter, as the S&P 500 finished the quarter down 5.28%. The Nasdaq closed the quarter down 4.11% and the Dow down 6.7%, as many began to abandon the idea of a “soft landing” and prepared for a recession.   

As we have seen throughout 2022, bearish talking points have continued to pile up, leading to sustained levels of volatility. Geopolitical tensions remain more elevated than before, and worries have grown that a debt financialized global economy may not be able to withstand the ferocity of the tightening cycle.  It is believed that supply chain issues are resolving, which on the surface is positive, but when coupled with record inflation, there is fear that as companies are racking up inventory, consumer spending will slow and force steep discounts that lead to earnings shocks. A further drag on many American companies has also been the growing strength of the US dollar, which is up over 19% in the last year. When you look at the companies that make up the S&P 500, 31% of revenue comes from overseas, and it is estimated that every 1% of appreciation in the dollar translates to a .12% drag on earnings. This year alone, the exchange rates have led to a roughly 2.3% negative impact across the S&P.  

Despite all the headwinds, in looking at the underlying numbers, there has yet to be a significant “crack” in the economy. Consumers are still spending at above average levels, and the labor market is still stronger than it has ever been, with employment continuing to tick down. 

However, it is clear equities have been discounted to account for the future effects these significant policy changes may have in the coming months. This is the perfect reminder that stock prices are forward looking, and the stock market typically bottoms 3-6 months before the economy. Those that wait until the news improves will likely miss out on much of the upside. 

Ultimately, trying to time the market and predict a bottom will likely prove futile. As highlighted by the great value investor Shelby Davis’s quote, many of the best performing days occur in a bear market: bear market rallies can be fast and powerful, gaining 10% in a matter of days. Investors attempting to time the market could miss out on these, leading to significant long-term destruction of returns. Since 1990, the hypothetical growth of $1,000 in the S&P would be worth $20,451. If you miss the best 5 days, that falls to $12,917, and if you miss the best 25 days, that falls all the way down to just $4,376. The drastic difference shows the importance of staying invested for the long-term investor, since nobody knows when these days will come. But if there is one thing we do know about the US markets, it’s that they are resilient. Since 1929, there have been 16 recessions that have had an average drawdown of 33.5%. We have experienced a World War, the Cuban Missile Crisis, a global pandemic, and much more in between. Since World War II, the market has been down more than 20% in a year three times, 1972, 2002, and 2008. The following year stocks gained 31.5%, 26.4%, and 23.5%, respectively. One thing that is consistent: investors were ultimately rewarded for their discipline in staying the course. Make no mistake, with all the headwinds we face today, the market may go lower first. While the timing for recovery is unknown, history shows us that it will happen, and patience and cool heads will once again prevail. For those who have medium to longer time horizons, we believe this difficult cycle is creating opportunity.  

John Webb 

Financial Advisor 
Pinnacle Asset Management
Raymond James Financial Services 

Kidd Private Wealth Group