Quarterly Investment Report: 3Q of 2022 – Kassouf Wealth Advisors

All of us at Kassouf continue to work with Capital Directions to provide a steady focus in these uncertain times. While there are many indications that the economic downturn is real, the unknowns are the length and the depth before the market makes a positive turn.

There are unique aspects to every economic crisis and stock market decline. The world evolves and events never combine in quite the same way as they did in the past. The current “this time it’s different” rationale is that inflation is out of control because of the unprecedented amount of money central banks added to the global monetary system to combat the economic shock caused by the Covid pandemic.

Before we do a deeper dive into that, let’s take a brief look back at some of the more notable “this time it’s different” cases that were made in prior bear markets and economic downturns:

2020: “This time it’s different because we’ve never had the entire global economy locked down for weeks and months.”

2008: “This time it’s different because subprime mortgage derivatives have poisoned the entire global financial system.”

2001: “This time it’s different because the U.S. hasn’t suffered an attack of this magnitude since Pearl Harbor.”

2000: “This time it’s different because the largest asset bubble in history just popped.”

1997: “This time it’s different because unprecedented Asian currency devaluations are going to cause a contagion that will collapse economies around the world.”

1987: “This time it’s different because computerized program trading has completely destabilized the global financial system.”

Notice the common theme? They all involve unprecedented events that have a global impact.

The stock market overcame every one of them. The period of time to recover varies, but the outcome is always the same: the short-term downturns are temporary, and the long-term upward trajectory of stocks is permanent.

In the middle of an economic crisis, though, emotional investors become concerned and may fall victim to recency bias, which is a tendency to focus on recent events and trends and project them into the future indefinitely. They extrapolate the current knowns into an unknowable future and convince themselves things aren’t going to improve any time soon.

That brings us to the current environment, with inflation at a 40-year high, major stock benchmarks in or near bear-market territory, and the Federal Reserve and other sovereign banks struggling to reduce the amount of money that was added to the global economy in recent years.

How long it will take for the Federal Reserve to get inflation under control is unknown , but we can look to the past for a precedent. In 1980, in an effort to get double-digit inflation under control once and for all, the Fed hiked the prime lending rate to an unheard of 20%. That triggered a deep recession, and the stock market plunged accordingly, with the S&P 500 declining 28.5% from March 1981 to July 1982.

But the dramatic rate hike quickly knocked inflation down, with the inflation rate plunging from 13.55% in 1980 to just 3.21% by 1983. Stocks responded in kind, beginning a roaring bull market in 1982 that continued for the next five years.

Hopefully the government won’t have to resort to the measures it used in 1980 to tame inflation, but the point is that it was much quicker than most believed possible.

We will leave you with the below Life magazine cover from June 1970 that someone recently passed on to us–one that certainly evokes our current economic environment:

For the record, from that issue’s date of publication, the S&P 500 index gained 121% over the next 10 years, 996% over the next 20 years, and 21,059% through 9/30/22.

Source: Morningstar Direct

It is times like these that your financial plan is of utmost importance. The financial planning we do for our clients includes the assumption that we will endure a bear market like the one we are currently experiencing. We encourage you to continue to review your plan with us on a regular basis and keep us informed of any changes to your situation.

Thank you for letting us work with you.

Your financial planning team:

Gerard J. Kassouf, CPA, CFP® AEP ®