Market Update – September 2022

Market Update

Equity market turbulence has continued into September, as investors debate the lasting effects of high inflation and the potential for greater economic slowdowns. Markets have given back gains achieved in the first week of the month with the S&P 500 Index now trading close to the lows seen in early summer. While unfortunately unable to record a podcast this past weekend due to our transition, we hope this mid-month newsletter provides a timely update on markets until The Wise Investor Show returns next week.

The primary driver of market weakness continues to be concerns over the potential for a major economic slowdown in the coming months. As we’ve noted a few times this summer, it’s likely markets continue to be rangebound between the June lows and mid-August highs until further economic data pushes markets one way or the other. To that point, a brief rally triggered by encouraging inflation data in the late summer ended with a worse than expected August CPI print. Alongside continued hawkish commentary from the Federal Reserve, this spooked investors into once again raising expectations for the number of rate hikes over the coming months. As a result, expectations for a more severe recession in 2023 increased, driven by concerns of the Federal Reserve’s willingness to endure significant economic hardship to curb inflation. Furthermore, notes from the most recent Fed meeting stated the central bank’s projection that the unemployment rate in 2023 would be notably higher than they thought just a month ago, adding fuel to the recession fears.

However, while it’s easy to get caught in doom-and-gloom narratives, we believe it’s also important to remember that markets have already been pricing in the chance of a global economic slowdown for much of the calendar year, and valuation multiples, in aggregate, have contracted to levels we have not seen for several years. It’s quite likely that there will be many companies that will struggle in the coming months and see earnings contractions to the point that valuations currently perceived as “cheap” are actually “fair” or even elevated based on their actual forward earnings. However, we argue that there will also be companies – superior operators, with strong cash flows and established competitive positioning – who will be able to demonstrate earnings power and able to fund company operations without issuing debt at now significantly higher interest rates. Underlying economic data and select company results also continue to suggest that there are pockets of strength in the economy, where the astute investor can invest in undervalued companies that have the potential to outperform in either an economic slowdown or a “soft landing” scenario, where we avoid prolonged economic weakness.

We certainly aren’t enjoying this market volatility, but it’s in no way surprising. During the downturns in 2008 and 2012 we experienced numerous rallies and frustrating selloffs before markets finally bottomed and started to recover more sustainably. As our founder, the late Rick Malone, used to say, these are the “fleas that come with the dog” in the life of a long-term investor. As in any turbulent market period, we encourage investors to have a plan and stick to it. Here at The Wise Investor Group, our home may have changed but our time-tested value-oriented principles have not. We will work, as we always have, to identify the highest quality companies and purchase them at reasonable valuations. We will continue to focus on maintaining investment discipline and understanding your unique financial situation, tailoring financial plans, and building your portfolios to best achieve your life goals. Most importantly, we will always be there for you, as we have been for the past 30+ years.

Thank you for your continued trust and confidence in The Wise Investor Group.

Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and investors may incur a profit or a loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.