This last quarter took a bit of the fun out of the year we were having so far. Markets were down across all asset classes. U.S. stocks were off -3.25%, Real Estate’s quarter drop pulled its year-to-date return into negative territory, and Bonds were down similar to stocks at -3.23%.
Do we like this? Absolutely not.
Are we surprised by the pullback in the markets? Absolutely not.
I love this picture from JP Morgan and try to revisit it at least once a year. It shows the intra-year declines for the U.S. stock market vs. the ending year return. In other words, the red dot shows how far the stock market fell at any point during the year and the black bar shows how the year ended up return-wise by 12/31.
So far this year we’ve felt an 8% drop. And I mean felt in every sense of the word. It hurts whenever the market goes down.
And yet, the market is still up 12% for the year. In other words, you have more wealth than you did at the start of this year, even though this last quarter feels like you’re way behind again.
We can see that this is how markets work. Crazy market drops during the year, but most of the time we end up positive by year-end. We actually average a drop of 14% every year. Every year!! This is what I mean by this past quarter not being surprising.
And this is how it goes: back and forth, up and down. We’ll file this quarter away in the “not good” folder and move on. Quarter to quarter, it’s hard to grasp how we’re really doing.
Can we just acknowledge that things are weird?
The largest worries have been two-fold: high, persistent inflation which would lead us into a recession.
We saw gas prices explode and inflation hit 9%. Then we saw the Fed take one of the most aggressive rate hikes in history. In every other period of high inflation, it has always been tackled by a recession.
And yet…..inflation has come back down. Unemployment has fallen and GDP continues to grow.
I don’t think anyone expected that to happen. Me included.
I’ll keep snacking on my humble pie and controlling what we can control.
Now to some charts!
Inflation ended August up 3.7% over this time last year. Yes, prices continue to go up. But what we’ve seen is the rate of that increase has dropped (this is good!). While we all want milk to return to the price it was in 2019. It ain’t happening. If that were to happen, then we would be in an environment of deflation, which is bad, bad, bad. It’s worse than inflation because with deflation, people won’t spend money. The expectation is that prices will be cheaper in the near future, so why would you buy something today? No bueno for an economy when no one is spending money.
Real GDP (read: after inflation) continues to grow steadily. The most recent revision has 2nd Quarter Real GDP at 2.1%.
The unemployment rate remains low at 3.8% through August. As much as we want to complain that “no one wants to work.” It’s just not true.
Housing prices remain flat even with mortgage rates that have tripled. It’s a standoff between those with homes and very low mortgage rates to those who want to buy homes and can afford the increased mortgage payment.
Tax, Legal, & Legislative Updates
Social Security cost of living adjustment (COLA) for 2024 will be 3.2%.