October 5, 2022

Minute Market Update – Navigating through turbulence can lead to opportunity 10.05.2022

WRITTEN BY: Kingsview Investment Committee

Investors entered the third quarter hoping to see signs of market recovery following 2022’s poor first half. However, those hopes were dashed when the Federal Reserve reiterated its desire (goal) to reduce inflation toward 2% with little regard for the potential effects on the economy. After previously claiming inflation was “transitory”, the Fed has pivoted toward aggressive rate hikes over the past six months.

Increased rates have created competition for stocks since investors can buy a 1-year Treasury bill for 3+%, a level that hasn’t been seen in over a decade. Furthermore, job growth and labor market strength remain tenuous as wage economics attempt realignment from levels that were likely unsustainable.

With the market now back in “bear market” territory, what might investors expect going forward?

Kingsview Investment Management believes that some legitimate market uncertainties on revenue growth, profitability, and valuations for various stock indices remain. When looking at historical valuations of the S&P 500, the decline of 20% has not yet moved the averages into “cheap” territory, just less expensive.

Historically, periods of bear market declines have settled around a valuation level representing sixteen times earnings. If earnings peaked at roughly $200 per share, this predicts a possible resting spot for the markets could be as low as 3200. Whether we see another drawdown or the markets stabilize remains to be seen.

Within the fixed income market, we expect the direction of credit spreads and yields, in general, to remain volatile for the near term, but should settle down into a more investable range. This will welcome back investor dollars and lead to what we feel should be a more favorable market environment for everyone involved.

The good news among all the pessimism in the equity market is that the outlook for returns is rising and is starting to provide better estimated returns than the bond market. For the patient long-term investor, forward returns have historically been strong during similar times of extreme pessimism. During these times, it is critical investors understand the nuances of balancing the perspective of the short-term pain versus the long-term gain landscape.

Investors that have participated in the market in the last five years have experienced three bear markets. However, the recoveries between those bear markets have far outweighed the losses experienced during the bad times. As of the close of Q3, an investor that bought SPY (SPDR S&P 500 ETF Trust) five years ago experienced a total appreciation of 55.01% (Source: Bloomberg, 9/30/2017 – 9/30/2022). Time and again, the market has shown an ability to roar back from these bear markets within two years and push to even higher highs.

Maintaining perspective on the goals and plans we have set in place is paramount when uncertainty and fear arise. While it may feel like “this time, it’s different,” history and experience suggest it is not. We have seen this movie before. As in previous similar circumstances, it can be beneficial to have an actively managed portfolio that is not emotional in its execution.

Kingsview Investment Management remains diligent in our processes and focused on the long-term outlook of our strategies. We feel investors should remain engaged with their investment solutions and utilize time-tested, defendable investment methodologies, even when times may feel dark.

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