July 26, 2022 Letter to Clients

As we’ve crossed over into the second half of 2022, we hope you and your families are enjoying your traditional summer activities, finding time to relax, having fun and relishing life. At this midway point of the year, most of the first half’s significant headwinds are still in place: high levels of inflation, slowing growth, rising interest rates, Federal Reserve (the Fed) policy uncertainty, the fallout from Russia’s war on Ukraine and the ongoing interruption to energy supplies. Heading into the current year, we anticipated rising interest rates and increased volatility, however, no one expected it to happen as rapidly as it did. It was expected to likely be a more gradual process. The unexpected war in Ukraine sent energy prices spiking, and supply-chain problems were more prolonged than expected, thus causing inflation to spike sharply higher. 

 The downturn we’ve witnessed in both stocks and bonds this year has been painful to experience, particularly being that investors benefited from exceptionally strong years in 2019 and 2020, with the S&P 500 returning 31.5% and 18.4%, respectively. The inflated returns in the financial markets continued into 2021, with the S&P 500 returning 28.7%. This current year reminds us that investing is not a straight arrow up. Rather, it is filled with ebbs and flows along the way, as evidenced by the S&P 500 reaching bear market territory in mid-June, defined as a drop of 20% or more from a recent peak. Over the first six months of the year, the S&P 500 dropped 20.6%, marking its worst first-half performance of any year since 1970. The tech-heavy Nasdaq fell even further, dropping more than 28% over the same period; the Dow Jones Industrial Average dropped more than 14%, a stark contrast to the previous last few years to say the least.  

 The inflated stock market returns can be compared to the skyrocketing home values as a result of the housing market boom, something we all watched with awe and disbelief as the value of our homes rose quickly and drastically.  Between September 2019 and September 2020, homeowners accumulated a collective staggering $1 trillion in additional home equity.The exploding demand, in conjunction with a historically low supply of housing, led buyers to desperately bid up the prices of available properties, sending home prices soaring. 

Recession Status, Outlook and Stock Market Performance  

Recession Status and Outlook 

A simple definition of a recession is two consecutive quarters of negative Gross Domestic Product (GDP) growth. Other criteria to consider when determining if we are in a true recession or simply a slowdown include declines in real income, employment rates, industrial production, retail sales and consumer spending. The US economy shrank in the first quarter to start the year and the second-quarter’s GDP results will be released later this month. The economy continues to grow along with the job market, consumer spending, and the ability to spend, all which remain healthy, albeit at a subdued pace. Therefore, the signs listed above are not yet signaling a recession. However, being that economic statistics are backward-looking, it is not uncommon for the announcement that we are officially in a recession to come until we’ve been in one for two quarters, and we do believe we have already entered one.   

No two recessions are the same or created equal, and we believe this one will be less severe than the most recent ones, including the brief recession caused by COVID, as well as the 2008 financial crisis. The stimulus provided during COVID strengthened the balance sheets of households and businesses and the US government typically delivers fiscal stimulus during a recession to help jumpstart the economy. Most of the direct stimulus in response to the COVID recession benefited consumers after the recession ended in April 2020, resulting in stronger consumer and corporate balance sheets compared to previous economic cycles. While inflation is clearly reducing the strength of those balance sheets, the labor market remains incredibly strong, which may help reduce the magnitude of a recession. 

A Look at Stock Market Performance 

The economy is not the stock market, and the stock market is not the economy, even though the two are intertwined. With stock markets reflecting future expectations for the economy, they can move up during a recession or even down when the economy is expanding.  This leads everyone to ask the question - will the markets not recover until a recession has ended? While it is impossible to predict what is going to happen next, we can turn to history for insight. Stock markets, unlike economic statistics, are forward-looking, and they often start going down before the economy turns south. Similarly, they start turning back up before a recession ends. Historical data provides evidence of S&P 500 performance prior, during, and at the end of previous recessions. 

  • Since 1953, the US has experienced 11 recessions, during which, on average, stocks did worse before a recession began than during the recession itself. 
  • Since 1953, the stock market, on average, peaked six months before the start of the recession and incurred most of the losses during that period. 
  • Looking at the market recovery, in all but the technology crash of 2001, the market on average bottomed three months before the recession ended, with significant positive returns from the lows to the end of the recession.  

A look at the last column is compelling.  It illustrates that those investors that maintained their stock exposure during the majority of the previous 11 recessions were rewarded with significant positive returns, and for those who did not and opted to “get out”, waiting until the “all-clear”, would have missed out on the initial market rebound as timing that is just not possible. This brings us to our next topic of time in the markets.  

Time in vs. Timing the Markets  

We recognize that market volatility is a source of angst for even the most seasoned investors. For those in or nearing retirement, this can be especially true. The compelling urge to attempt to preserve your money by moving out of the markets is not uncommon. As we have done in the past, we would like to revisit the impact of moving out of the markets during times of turbulence, while also offering some guidance of what we do as part of active management of your portfolio, particularly during times such as these.  

You may have heard the saying, “it’s not about timing the market, rather about time in the market” that makes for a successful investor. On average, every year the market suffers three 5% corrections, one 10% correction and a decline of 20% every three years or more. Since clearly these statistics show that market pullbacks are frequent, one can certainly argue that avoiding just a few of them could potentially add to investment results. However, attempts to avoid pullbacks often lead to missing out on significant advances. The reason for this is that big market moves, both down and up, often occur within days of each other, making it extremely unlikely that an investor will be successful when attempting to time “getting back in” to reap those advances. 

 As an example, an investor who remained fully invested in the S&P 500 Index during 2020 saw a total return of 18.4%. On the other hand, if an investor sold when the market dropped, they may have possibly avoided some of the losses, but they could have also potentially missed the trading days with the greatest gains. Research shows that simply missing the top 10 trading days in 2020 would have led not only to giving up the gains, but an investor would have experienced a loss of 32.9%.  


This phenomenon is not isolated to 2020. A publication by Putman Investments shows that over the last fifteen years, a period which includes the COVID-driven recession as well as The Great Recession (the most severe recession in the US since the Great Depression) an investor who remained invested in the S&P 500 Index would have generated an annualized return of 10.66%. However, simply missing the top 10 days would cut returns by 50% to 5.05% annualized returns. The results become more dramatic when simply missing the top 30 days, which leads to annualized losses of -1.18%. 

As compelling as data can be, it is understandable that the market’s normal ups and downs can be stressful, and a chart brings little comfort when we experience the real impact to our portfolios when the markets are down. We do hope however, that this data provides some context as to the reasoning why we recommend that clients not deviate away from their actively managed, well-constructed, and properly diversified portfolios when markets are down. Doing so creates realized losses and can leave you on the sidelines when the markets rebound, which they always do. The key to long-term investment success is the decision to be invested and stay invested.  


Retirees: A Special Note to Clients in or Nearing Retirement 

Those who are retired or are nearing retirement are the individuals most likely to have experienced multiple recessions and numerous market downturns, as well as their subsequent rebounds, thus having gained the investment experience that comes with it. That said, we recognize that significant market swings, inflation and recession talks pose greater concerns for those folks. We would like to address some of the most common questions and concerns as well as recommendations we have for our retirees.  


  • Savings: Having a solid cash position in the bank is important. When the market is in a downturn (stocks are down), it is best to draw from cash, if possible, for living expenses versus drawing (selling stocks) from investments. Cash is earning minimal interest and that cash, although not subject to stock market swings, is losing purchasing power to inflation, especially with the current inflation rate of over 9%.  
  • Interest Rates: Variable rates, such as what we pay on credit card balances, is on the rise. These rates rise considerably faster than the rates being paid to you in your savings account.  If you carry a credit card balance, we recommend reviewing your budget to put a plan in place to paydown those balances as quickly and comfortably as possible.  
  • Retirement Planning: We encourage those clients who anticipate retiring in the next few years to touch base with our office. This is a good time for an overall financial review, and it is important to assess how your workplace retirement plan, such as your 401(k) or 403(b), is invested. The allocation of stocks to bonds that you may have chosen in your 40s or 50s may no longer be appropriate, and a check-up is wise. 
  • Asset Allocation: During turbulent times, it is not uncommon for investors, especially those in or near retirement, to question their allocation of stocks to bonds and wonder if shifting more or all into bonds is best. Fortunately for our clients who are in managed, properly diversified portfolios, the allocation of stocks and bonds and just as important - the quality of the investments owned, has already been taken into consideration. They are consistently reviewed to make certain appropriate decisions are being made given that client’s individual financial and income needs. Our years of experience allow us to recommend suitable allocations for each individual client, knowing the markets and the economy will have the inevitable bumps along the way. We discuss the bond market in more detail below.  
  • Income: Understanding your income needs plays an important role in retirement planning. As we are living longer and with inflation always being present, be it at the target 2% or running hot at over 9%, remaining properly invested in retirement is especially important because the growth that comes with investing over time, even with the market swings, is critical to meeting the cost of living in the future. 

The bottom line is that our retirees are invested in diversified balanced portfolios that are invested appropriately for each individual’s time horizon, goals, income needs and risk tolerance. This is why the best course of action in times such as these is typically inaction on the investors part, meaning a significant shift away from your constructed portfolio is not recommended. Rest assured that action is being taken within your portfolios as we take advantage of attractive asset-class opportunities as they arise that fit within your investment objectives.   

Bond Market 

Understanding the bond market can be confusing for certain. Prices, yields, interest rates, yield curves…. there are many terms and knowing if owning bonds in your portfolio, and how much to own, is a question that is asked most often when market volatility spikes.  

The Federal Reserve’s recent attempt to tame inflation has resulted in a sharp decline in bond prices and the current situation is unique. To better understand the complexity of the current situation, let’s start with why bond prices decline and why someone who is invested in bonds can still experience a drop, even temporarily, in their account balance. A bond purchase is similar to making a loan to a corporation or a government entity. A bond held until maturity pays interest (also known as a coupon) periodically, providing income to your portfolio and returns the principal paid when the bond matures. Let’s assume the coupon rate of a bond is 3%. When interest rates rise as they are now, new bonds will be issued with a higher coupon rate than that 3%, which means the old bond with the 3% coupon is now less desirable.  

Who wants to earn 3% when you can earn more? For the 3% bond to be attractive to investors to buy, it must be priced at a discount. No one is going to pay full price for an old bond that is paying less interest than a new bond. This causes existing bond holders to see price declines when interest rates rise. Simply put, the value of old bonds decline in a rising interest rate environment.  

While this may seem like more negative news for fixed income investors, which typically includes retirees, there is a silver lining. Historically low interest rates that the Fed had maintained since the global financial crisis made relying on bond income very challenging. With rates now rising, bond investors may once again be able to earn more attractive returns. Should the Fed decide to hike interest rates aggressively, this could create potential for higher coupon payments and higher total returns over time, particularly since high-quality investment grade bonds, corporate bonds, have become cheaper and are at attractive prices. Panic selling in the markets has presented opportunities for bargain shopping for those high-quality bonds and for investors to reap higher yields until a time when the economy slows and the Fed sees fit to cut interest rates.  

For our clients seeking income and added diversification, bonds, along with high-quality dividend paying stocks, can have a meaningful part in a diversified portfolio along with the long-term growth that stocks can provide, something investors need in order to keep pace with inflation. We, along with the bond portfolio managers we work with, have the research, resources and investment expertise required to identify fixed income opportunities while managing the risks associated with bond investing, particularly in a rising rate environment.  

Looking Ahead  

While we are still facing the headwinds mentioned in our opening paragraph, there may also be better news ahead, which include more moderate inflation, the slow but very welcome easing of prices at the pump (barring any catastrophes from hurricane season or new geopolitical tensions), the ongoing resilience of the consumer which fuels the economy, and a Fed that may soften after completing the initial round of outsized rate hikes.   

We see opportunities for our clients to see favorable returns to end 2022, as we anticipate the major indexes will likely end this year higher than they stand now. As share prices begin to promise a buy-low opportunity that outweighs the risk of further decline, this should entice investors who exited the market to jump off the sidelines, therefore assisting the market to stabilize and begin to recover. For our client’s portfolios, we believe it became increasingly more important this year for our firm, along with the portfolio managers, to utilize our experience, knowledge, and resources to employ a more tactical approach to stock and bond selection. Recognizing that rising rates and inflation favor more value and dividend-yielding stocks, identifying the companies less impacted by the Russia-Ukraine war, and selecting instruments that appreciate more with inflation are just a few examples of this approach. We do this with the goal in mind to add portfolio value over time but to also hedge against risk.   

As we always do, we welcome the opportunity to have a conversation with you should you wish to discuss your portfolio, have questions or concerns, or need to make us aware of any significant life changes. Lastly, we wish you all a very enjoyable remainder of your summer.  


Best Wishes, 

Steve LePage  

*Please note: Diversification and asset allocation strategies do not assure profit or protect against loss.*