Today I'm sharing my third quarter (Q3) review of the global financial markets.

I call these reviews "Signal in the Noise."

Why?

Signal is meaningful information.

Noise, on the other hand, is the random (often unwanted) distraction that interferes with the signal itself.

With the non-stop "breaking news" cycle, it can be difficult to maintain the long-term perspective that's required to be a successful investor.

In other words, it can be hard to find the signal in the noise.

Not to worry, though, I'm here to help!

Q3 in Review

In this review, I'm sharing broad positive trends that are occurring but receiving little (or misguided) attention.

I hope you find it useful in gaining perspective as you navigate the markets and pursue your retirement goals.

1.) The Rough Ride Continues

Year-to-date market performance (as of September 30, 2022):

1. S&P 500 (US Stocks): [ -23.87% ]
2. Russell 2000 (Small Cap): [ -25.10% ]
3. NASDAQ (Tech): [ -32.00% ]
4. MSCI EAFE (International): [ -26.76% ]
5. MSCI Emerging Markets: [ -26.89% ]
6. Bloomberg US Agg Bond: [ -14.61% ]

2.) Zooming Out

Despite U.S. stocks being down 24% this year, the 5-year total return of the S&P 500 is still an annualized +9.13%.

For the last 10-years...

...the average annual return has been 11.85%!

I share this with you simply to remind you that things have been good for quite some time. (Source: S&P Global)

3.) Future Returns are Promising

When stock prices fall, future returns generally improve. This is obvious but somewhat counterintuitive.

Sometimes, the market can act like a slingshot—you must pull it back to propel it forward. 👇

The above chart is a good reminder why "Stay the Course" is perpetually good advice.

4.) Your Shares are Worth More

For the first time ever, stock buybacks exceeded $1 trillion.

In other words, when a company like Apple buys back their stock, existing shareholders (most of us?) end up with a higher ownership percentage...

...without doing anything at all! (Source: S&P Global)

5.) Companies are Investing in Their Future

Not only are companies increasing the value of your shares through buybacks, but they are investing in their future as well.

S&P 500 companies have grown their capital spending faster than stock repurchases for the first time since early 2021.

And that's after repurchasing $1 Trillion in stock. (Source: WSJ)

6.) Dividends on Track for a Record Year

Despite the tumultuous market, dividends are on track to pay out more than ever this year.

The current 12-month dividend growth rate through June was 10.64%. That's an average annual growth rate of 5.88%!

This is one VERY good reason why investors should focus on the companies themselves, not on their stock prices. (Source: Yardeni)

7.) Global GDP Crosses $100 Trillion

The IMF projects that the global economy will hit $104 trillion in 2022.

If you were going to pay attention to one piece of data that acts as evidence of human progress, this might be the stat to follow.

While humanity will assuredly hit bumps along the road...

...human progress is an unstoppable force, and the public markets are how we participate in this continued growth.

8.) Bonds Have Gotten Crushed

From 1980-2021, bonds only fell in value four times. The most significant decline was -2.9% in 1994.

Most people are well aware of the rough year in stocks, but this year bonds are down ~15%.

This year serves an important reminder that bonds are NOT risk free.

And while bonds have an important place in our portfolios, we do not should not consider them to be the primary driver of returns.

9.) The U.S Dollar Remains the World Reserve Currency

Currently, the dollar's strength (relative to other currencies) is almost at a 20-year high.

Over the years, there has been a recurring prediction that the dollar will be replaced as the world reserve currency. But during a global crisis, the "flight to safety" is the ultimate signal of what the world deems safe.

This year's experience has shown that the dollar is still the world's preferred safe haven. (Source: St. Louis Fed)

10.) Long Live the Index Fund

For the first time, passive U.S. stock index funds (e.g., Vanguard Total Stock Market) have overtaken actively managed funds.

Active management is necessary for proper price discovery. However, it appears that the majority of investors have found indexing to be the smartest way to access to the markets.

And this trend doesn't look like it will be slowing down any time soon. (Source: Financial Times)

11.) Financial Conditions of Consumers

Many pundits like to point out the deteriorating condition of consumers.

Are they deteriorating?

A little, but only because stimulus bills resulted in the best conditions in our history.

Are things dire?

No.

Debt service ratios and delinquency rates are rising, but they are still lower than they've been in decades. (Source: JP Morgan / St Louis Fed)

12.) Not the Year for Optimism

We are currently on pace for one of the worst years on record for investor sentiment.

In fact, the average bearish sentiment for 2022 currently exceeds the previous record from 2008.

If it's true that the market has a way of disappointing the greatest number of people, we may be setting ourselves up for a nice recovery sooner rather than later.

💥 Fun fact: In prior periods following a consumer sentiment trough, the average 12-month subsequent return was +24.9%. (Source: Bespoke)

12.) Two Available Jobs for Every Unemployed Person

While a forced economic recession seems eminent thanks to the actions of the Fed, the economy continues to defy expectations.

As just one example, there are still almost two job openings available for each unemployed worker.

It's safe to say that if we experience a true recession that it may not be the typical song and dance. (Source: St Louis Fed)

13.) Earning a Return on Cash

One small bright spot about the rise in interest rates this year is the ability to (finally!) earn some interest on our cash savings.

While many traditional banks are still paying nothing, many reputable online banks are offering interest rates on FDIC insured cash above 2%! (Source: NerdWallet)

Final Thoughts

Candidly, I know this year has been an exhausting investing experience thus far.

I know this because I'm exhausted too.

That said, as bad as the news makes it sound, there are many things to be positive about.

While it may not be a comfort to us at the moment...

...being patient and disciplined through all of the ups and downs has historically been the right strategy 100% of the time.

We may have to search for it, but there is always signal in the noise.

As always, please reply to this email with any comments or questions. I read and respond to every message. 😊

Stay wealthy,

​

Taylor Schulte, CFP®