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My Notes on the Market: September 2022 Investment Recap

My Notes on the Market: September 2022 Investment Recap

September 26, 2022

On September 21, the Federal Reserve raised short term interest rates another 75 basis points, the third consecutive 75 basis point increase in the last 3 meetings. The rate increases are unprecedented in history and represent their response to higher inflation readings over the last 6-12 months.[i]

 A Federal Reserve response this aggressive at raising rates is in contrast to a Federal Reserve that left short term interest rates near zero for 5 years even in the face of strong economic growth and oddly spiraling higher asset prices.[ii] We think their aggressive response is as curious and as possibly misguided now as it was leaving rates at zero for years.

Be that as it may….

At the end of the day, it doesn’t matter what the Federal Reserve does, all we can control is our response to an entirely new economic setup. We have choices as to how and where to deploy our investment capital – and this is based on a thoughtful, conservative, long-term investment process that can provide strong long-term income returns that will allow for a secure retirement.

It cannot guarantee not having a bad or negative total return year. We are clearly going to have the worst total return year ever experienced in the fixed income category. Most of our client accounts are going to be down somewhere between 10-15%, almost unfathomable in our mind and at the near lowest end that we ever thought even statistically possible.

How did it actually happen? Very simple, interest rates have exploded higher. The 1-year Treasury bill went from a yield of roughly 0.3 percent in January of 2022 to a current yield of 4.1 percent[iii]. Could you imagine being a corporate CFO trying to steer a company through this level of a rate rise in nine months? The yield up tenfold? In nine months?! My gosh.

Rising interest rates make existing bond prices go down. A rate rise of this proportion in 2022 have made bond prices go down a huge amount. That is the cause of the declines in the bond and fixed income funds that we own.

Not to be insensitive, but in all honesty, we take away many positives from the crazy developments of 2022. We acknowledge an unprecedented size of unrealized losses, but there are actually many positives to the future setup. We list 10 positives – some a tad humorous, but all very factual:

  1. It’s September. The year is almost over. We need to get out of 2022, the worst investment year since 2008[iv]. In 3 months, we will be on to 2023. It will be better – it surely can’t be worse.

  2. All of our clients were 100% prepared for this downturn. We enjoyed very nice returns the last 10 years; one could argue we had a bad year coming. No client is overextended financially, no borrowings, no excess assets, no bad or aggressive investments, and no big and life changing losses. We are all able to sit back and take our income to underwrite our financial life.

  3. Income generated is the same and rising. Dividends on some funds have risen already so people are earning more than when the year started.

  4. We speak near weekly with Lord Abbott[v], Nuveen[vi], Blackrock[vii] and Invesco[viii]. They speak of many positives: credit quality is very solid, defaults are small, dividends are strong and will likely be raised in 2023 and beyond if rates stay up this high over the next year.

  5. We are always tax smart. Clients were well prepared and there are no financial surprises.

  6. Does anyone think the US economy can stand rates this high and not collapse? Housing and real estate is crashing under the weight of 6.5% mortgages. The corporate borrowing credit window is slammed shut and nobody can get credit or a loan if they need it. What that means is that once inflation is contained and the Federal Reserve is convinced inflation is back to its 2-3% long term target, they will start cutting interest rates and we can get some gains back in our bond portfolios possibly as early as mid to late 2023.

  7. All that matters is the income that our portfolios generate over time. For the last 10 years, all we could hope for was 2-3% returns based on super low interest rates in our bond funds. Going forward with rates way up here, we can generate much higher returns and much greater income over time.

  8. We talk to our clients all the time. In all honesty, they all clearly understand what has happened this year with interest rates. They also know that many investments have dropped 20-40% or more this year[ix]. Being down 10% and having your income unchanged and rising actually feels ok. The real pain is in borrowers and overextended businesses who can’t pay their debts. Borrowing costs have doubled in nine months, and very few investors and businesses were prepared for that.

  9. In the last 6 months, we have not made a trade in a client account. There is nothing to do. Sell investments at this point and at this price? Does anybody feel we are not close to the top end of the interest rate rise? There are no decisions to make at this time. Why would we turn off our income stream now?

  10. As a reminder: Our goal is to own long-term, durable, professionally managed, income-producing, low-cost assets. That has not changed. Performance has been the worst year in history. Life goes on, we take our income and hope for higher payouts over time. Fixed income investing with no defaults or impairment of capital will come back higher over time when interest rates normalize back to lower levels. We can’t say exactly when that will happen, but we will be watching closely.

We hope to hear from you! Feel free to call or email any time.

Be well.













The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.