The U.S. economy and stock market struggled in the three quarters of 2022. Facing a multi-decade high in inflation, aggressive monetary policy tightening by the Federal Reserve, and the effects of the Russia/Ukraine war, the S&P 500 index was down -18.52% as of September 7th. Sharp, countertrend rallies may continue this year, but aggressive Fed policy, the turning of the liquidity tide, and slower economic growth likely will keep pressure on stocks.
Beginning with the COVID-19 pandemic in March 2020, the U.S. economy and asset markets greatly benefited from the epic jolt of trillions of dollars’ worth of liquidity doled out by the Federal Reserve and Congress. With that liquidity now drying up—the Fed began raising short-term interest rates—many wonder whether a recession is likely. History’s lessons about the impact of Fed rate-hike cycles suggest a recession is more likely than a soft landing.
Although the S&P 500 index reached bear market territory (that is, a drop of 20% or more from a recent peak) in mid-June, many of its underlying stocks had been in bear markets for a while, as had the Nasdaq and Russell 2000 indexes. Short, sharp rallies within an underlying downward trend are typical of bear markets, so investors should be prepared for more volatility. Weakening earnings and profit-margin outlooks could prompt another leg down for the market.
In the meantime, this is not a market likely to reward excessive risk-taking, and we continue to emphasize the importance of diversification (across and within asset classes) as well as the power of periodic rebalancing (that is, trimming investments that have grown beyond your target allocation and buying more of investments that have become underrepresented).
Lastly, when markets become more volatile and weakness takes over from strength, we always remind investors that panic is not an investing strategy.
Cedrus Investments is a global boutique investment firm founded by Mr. Rani Tarek Jarkas more than 19 years ago. Mr. Rani Jarkas is a highly experienced and accomplished financial services executive, with over 23 years of international banking experience. Currently, Mr. Jarkas is the Chairman and CEO of Cedrus Group and its member companies worldwide.