The question I'm asked more than any other is:

So, occasionally, I like to share some charts and commentary to help answer this question.

Most of you are aware of my disdain for forecasting, so nothing in today's email should be perceived as such. 😊

Before we dive in, one final reminder about my "buy one, give one" offer this month.

More Than Money (Coming March 2023)

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To encourage your support, I’m running a “buy one, give one” campaign this month.

Here’s how it works:👇

1. ​Pre-order a copy of More Than Money (Kindle or physical copy) before Dec 31.
2. Email a screenshot of your order to book@youstaywealthy.com.
3. In return, I will personally match your order and send you a second copy to gift to someone in your life.

Thank you in advance for your support!

State of the Markets and Economy

The footnote in the chart below says that mathematically, "Even with consistent 0% month-over-month inflation, it will take us until mid-2023 to return to the Fed's 2% inflation."

This means that unless prices recede, inflation and interest rates are likely to remain elevated longer than most people anticipate and we should adjust our expectations accordingly. (Source: iShares)

HOW HIGH AND HOW LONG

As inflation falls, the question changes to:

Nobody knows how high the Fed will ultimately go (the Fed doesn’t even know).

Regardless, it’s interesting to see that in prior rate-hiking cycles, they’ve historically lowered rates shortly after hitting the peak. (Source: Schwab)

AS INTEREST RATES RISE, INVESTOR SENTIMENT FALLS

According to the AAII Sentiment poll, 2022 has generated 37 consecutive weeks of negativity.

This the longest streak that has ever occurred in the history of the poll.

As someone who believes that the market generally has a way of disappointing the greatest number of people, this may ironically bode well for 2023. (Source: Compound Advisors)

BOND INVESTORS AND THE TERRIBLE, HORRIBLE, NO GOOD, VERY BAD YEAR

Most investors have focused on the poor year in equity returns.

But the truth is that bond returns are clearly the story this year as they have experienced their worst performance in the last century.

(This year's return is on the far-left side of the graphic below.)

Since bond prices generally fall as yields rise, this performance is an obvious result of the Fed aggressively raising rates this year.

As we look forward to 2023, Blackrock notes that years following a negative performance have historically averaged returns of +6.8%. (Source: Blackrock)

ON THE GOOD SIDE OF FED RATE HIKES, BOND YIELDS ARE UP BIG

For the last decade-plus, investors have endured historically-low bond yields in their bond portfolios.

The one upside of the current environment is that bonds are finally offering some respectable yield again.

Higher yields mean higher expected future returns.

And higher future expected returns can improve the probability of success for retirement plans. (Source: iShares)

ON THE EQUITY SIDE, INTERNATIONAL MARKETS LOOK VERY APPEALING

International markets have been comparatively disappointing for diversified investors since the Great Financial Crisis.

But it appears that they are now potentially poised for outperformance.

Here's JP Morgan's note about the chart below:

"The left-hand side shows the price-to-earnings discount of international v.s. U.S. equities.

On the right-hand side, we show the difference in dividend yields between international and U.S. stocks.

We can see that international equities are trading at a significant discount to U.S. stocks and offer an additional 1% yield, on average."

Perhaps the time has finally come for U.S. Large Cap stocks to pass the baton. (Source: JP Morgan)

WILL THERE BE A RECESSION?

This is the million-dollar question. The answer is:

As you can see in the graphic below, we've had eight recessions since 1970, so it's clear that recessions are a natural part of the economic cycle.

In other words, we should always be expecting a recession.

However, we shouldn’t fear a recession…see the next note. (Source: St. Louis Fed)

IF A RECESSION IS LOOMING, SHOULD WE SIT IT OUT AND WAIT FOR THE "ALL CLEAR?"

Absolutely not.

Peter Lynch has famously said that more money is lost preparing for corrections than in the corrections themselves.

In other words, avoiding recessions and bear markets is, thankfully, not a requirement for investing success as the final graphic shows.

By staying invested through all eight recessions noted above—and many corrections and bear markets as well—$10,000 invested would have grown to $1.7 million during that time period. (Source: First Trust)

In Summary

Regardless of how bad the markets and economy seem at any given moment, there are two things that every historical bear market and recession have in common:

1. 100% of these cycles have come to an end.
2. Once we have the benefit of hindsight, every single one was an obvious buying opportunity.

I hope today's email offers insight into what I am thinking about and answers some of the looming questions regarding the state of the markets.

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Stay wealthy,

Taylor Schulte, CFP®