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November 2022 Q4 Economic Commentary

I hope all is well and that you are safe, healthy, and enjoying a joy filled beginning to the holiday season!

The challenges that have defined the markets in 2022 persisted through the end of the third quarter. As of Friday, November 4th, 2022, the S&P 500 was down 20.11% year to date and the Nasdaq was down 32.42%. [1][2] While the geo-political environment has played a role, the Fed’s assertive stance on interest rates, raising rates six times in 2022, with the last four being .75%, has had the most significant impact on markets and the economy. [3] Prior to this year, the Fed had not raised rates by .75% since 1994. [3] It is important to note that after that period of raising rates in 1994, the economy flourished and the S&P 500 returned 37.58% in 1995 leading to one of the stronger booms in history. [4] The volatility in the interest rate environment has resulted in the most challenging year for bonds on record, as the U.S. Government Bond index is down 16.65% year to date and the U.S. Corporate Bond Index is down 19.8%. [5] Even the value of gold, known as a safe haven, has declined 8.27% year to date. [6] While inflation and the Fed continue to dominate the economic headlines, the Q3 GDP came in at positive 2.6%, well above expectations and sharply above the negative quarters we endured in the first half of the year. [7] Additionally, as of October 31st, 2022, with roughly half of the S&P 500 companies reporting earnings, approximately 72% of those companies beat earnings expectations! This shows that many companies are navigating this environment with confidence and belief. [8] While it may seem counterintuitive, to control inflation, the Fed is literally trying to slow demand and pinch consumer spending with higher mortgage and borrowing rates. Many companies, notably in the technology and growth space, have announced layoffs and other cost cutting measures which will also have an impact on demand. We are also seeing some improvement in commodity prices in recent months. Homeowner equity peaked in May 2022, and as of September, home prices fell on a month-to-month basis for the third month in a row. [9] The hope is that between the Fed action on rates, slowing demand and decreasing commodity prices we will have an improved inflation number by Q1 or Q2 of 2023 which will allow the Fed to scale back their aggressive approach and take a more measured stance. That would be a point where we could see a more pronounced market rally emerge.

The recession debate continues among economists and asset managers. While the Q3 GDP provides some optimism in the near term, when you look more deeply at that number, you will find that personal consumption continues to slow. The reality is that to crush inflation, we may have no choice but to create a recession. The question then is, are we already in one. While that has not been confirmed, we can confirm that we have been entrenched in a bear market. When considering the history of bear markets, the average bear market recovery time is 18 months while the longest bear market (Dotcom bubble) recovery was two years and seven months. [10] Importantly, we are also in a mid-term election cycle. Historically, the S&P 500 has rallied after midterm elections. Since 1950, the average return for the S&P 500 in the 12 months after a midterm election is 15%, surprisingly with no down years in history! [11].

While I see volatility continuing in the coming months, there are signs that inflation is easing and that gives hope! I remain steadfast in my belief that over the long term, proper diversification and aligning your portfolio to your comfort level with risk remains a prudent strategy. Time and time again, it is proven that markets cannot be timed. No one has a crystal ball. Our best strategy is to be well-diversified, across asset classes and remain optimistic and vigilant during times of fear and panic. It is hard to believe that in a matter of four years we have gone through a trade war, the worst pandemic since 1918, geopolitical uncertainty, and the worst inflation since the 70’s, yet here we are, as strong as ever in my opinion. Our companies are some of the best in the world, providing goods and services to every corner of the earth. Our people are some of the brightest and hardest working in the world. I believe more strongly than ever in the long-term trajectory of the U.S. and global economy. We have needed a “re-calibration” of our market and change in our trade habits bringing what manufacturing we can back to the U.S. and diversifying our international manufacturing partnerships across ally countries. We continue to see some of this happening!

Thank you for the opportunity to serve you. My priority remains and always will be to ensure that you continue to receive high quality guidance and a client service experience second to none. While I continue to reach out via phone and e-mail, please know that I am available via Zoom, Facetime, any other digital technology you prefer and in person if you would like to meet. I am happy to meet with you at any one of my offices or at your home or near your home, whatever you prefer and with
whatever you are most comfortable.

Wishing you, your family, friends, colleagues and community continued hope, health and positivity in the coming weeks, months and beyond!

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