Moore Financial Solutions Third Quarter 2022
Tyler Moore • October 24, 2022
The third quarter of 2022 saw a further decrease in equity prices, as investors wrestled with the thought of an impending recession. We believe the primary topic leading to equity selling continues to be policy action by the Federal Reserve to reduce inflation. The S&P 500 fell another 6.27% in Q3, continuing a trend of losing quarters for 2022 (1). This movement in equity prices may likely challenge the willingness to hold tight in down markets, but we remind Moore Financial Solutions clients of the patience required when investing in equities. This quarterly review will highlight strategies in down market cycles, P/E ratios of equities, and include a review of Federal Reserve Policy changes made in Q3 of 2022.
Our clients find financial stability in periods of higher equity (stock) prices and often find themselves more willing to use funds for travel or planned home renovation, for example. By contrast, lower equity prices often create a commitment to be more disciplined with an investment plan. We encourage our clients to contribute (or increase contributions) to their investment accounts in these lower market cycles to prepare for a potential recovery in equities. 2022 has forced Moore F.S. to quickly change from a high equity price strategy to a sudden bear market strategy. Generally, this includes rebalancing into equities when appropriate, as well as an overall increased willingness to create new equity positions while markets are low. For many clients, we are looking to convert pretax money into post-tax accounts, when appropriate. Furthermore, we aim to increase allocations to small cap equities when appropriate. It is our opinion that small cap equities will rebound more sharply than large and medium sized companies. Our small cap strategy can only partially be put to work as we remain cautious of the impact higher interest rates can have on small companies who often operate on a more leveraged (debt heavy) balance sheet.
A top goal of Moore F.S. continues to be the education of investing principles. This quarter we highlight changes for 2022 in the P/E Ratios. Most likely you haven’t heard of P/E Ratios, but their simple structure can give equity investors a detailed look into market cycles. First off, what is a P/E ratio? A P/E ratio measures a stock’s current price, divided by its earnings per share (2). For example, AT&T’s current price per share of $15.56, divided by its annual earnings per share of $2.71, equates to a P/E ratio of approximately 5.74. In other words, when investors buy AT&T, they could assume it would take 5.74 years to recoup their $15.56. We use P/E ratios to gauge where the market is in terms of overbought or oversold. To begin the year, the S&P 500 had a forward-looking P/E ratio of 23.11 (3). Investors were purchasing the S&P 500 with the understanding that based on the current rate of earnings they are offering up 23.11 years of earnings to make the purchase. By contrast, the current (September 30th, 2022) P/E ratio of the S&P 500 is 18.12. In the opinion of Moore F.S., P/E ratios are a simple tool to evaluate investor sentiment towards equities and determine what level of risk pertains to investing in equities. This gauge is not perfect and does not determine the direction of equities. When the S&P 500 is near a 23.11 P/E ratio, we determine investors are more willing to accept paying a higher price for equities for a variety of factors. For example, the real return on bond fund yields (after inflation) being less than exciting. The average modern era P/E ratio of the S&P 500 is 19.6, while the average P/E ratio of the last ten years is 26.6 (4). We sense investors continued to buy stocks when the P/E ratio was above its average in expectation that earnings would increase. Furthermore, we forecast a gradual move back to a 20 P/E over the course of 18-24 months. In talking with clients, we have stated that we are increasing our exposure to equities, especially for younger, risk tolerant clients. We continue to believe that by looking at a variety of factors, including the drop in P/E ratio below the average, stocks offer an ideal entry point. It is certainly possible stocks could fall more before a recovery occurs. With equities more favorable now than to begin the year (in terms of P/E ratios) we remain optimistic. We believe equities will rebound to a more average P/E ratio, and we remain hopeful the earnings associated with equities will continue to increase, and ultimately not see a recession. In the most basic form, when you buy stocks, you are paying up front for future earnings. It is important to remember that in the short term, equities can be volatile, but historically they offer a very sound opportunity to create wealth and according to P/E ratios, potentially now more so than to begin the year.
The Federal Reserve offered policy changes during Q3 of 2022, as many predicted. On September 21, 2022, the Federal Reserve increased benchmark interest rates by .75%, representing another large and meaningful move. This increase took the Fed funds rate range to 3-3.25%. This represents the most aggressive Fed tightening since the Federal Reserve began using the overnight funds rate as its primary policy tool in 1990. In 1994 the Fed hiked a total of 2.25 percentage points. We later found out the Fed would begin cutting rates by July of the following year (5). We believe Federal Reserve Chairman Jerome Powell has surprised very few with this large rate increase. Moore F.S. sold all positions of iShares U.S. Treasury Bond ETF (GOVT) on July 14th, 2022, in preparation for the increases of rates. In cases that are appropriate for clients, we anticipate moving back into this and other bond positions in the 4th quarter of 2022. The iShares U.S. Treasury Bond ETF continued to move approximately 4.6% lower between July 14th and the end of Q3 (6). Bonds tend to offer an inverse movement with interest rates, as interest rates go up the value of bond funds go down. This downward movement in the value of bond funds as interest rates have risen, continues to negatively impact portfolios that hold bonds. Though we are not predicting the Fed to repeat their pattern of reducing rates the year following rate increases (as we mentioned above) this action would be a tailwind for bond funds in 2023, thus we aim to layer back into bond funds.
The challenge of volatile equity markets remains an emotional experience. I urge my clients to always respect the power of what stock markets really are, an emotional willingness to put money to work into companies that offer long-term growth. Without going into too great of detail, we live in an environment where algorithms move stock markets and can move markets very quickly. In my opinion, this gives way to environments where the S&P 500 can move up 13.7% in the first half of the quarter (June 30th closing price of 3,785.38 to August 16th closing price of 4,305.20 (7)) and suddenly make a 50% recovery for the year. I can assume that somewhere out there an investor decided on June 30th they have had enough of the market downturn and decided to move to a money market account, only to miss out on the next approximately 45 days. 45 days later (lets assume) that same guy or gal had a bad case of “fear of missing out” and reinvested into equities, only to experience the move lower over the next half of a quarter. Of course, this is purely hypothetical, but I use this example to remind you that my job is not only to act as a fiduciary, but also to keep us grounded in our plan. In many cases we must use equities in your plan to be able to hit long-term growth goals. Otherwise, we will see your purchasing power be eroded significantly by inflation. I don’t know when the bear market will be over, and I don’t want to begin to make that prediction. Rather, I’d like to voice my continued commitment to buying and holding for the long term. I believe you and I continue to make a great team and we will weather this storm, and likely many more in the future.
With many asset classes moving higher in Q3 we hope you were able to take advantage within your account! I’m pleased to be able to review an S&P 500 that was able to maintain a generally upward trend since April 8th, 2025, a day that would not so ironically be the only closing price below 5,000 so far this year, an important statistic we will discuss in greater detail later. As investors weighed a decreasing rate environment in which the Federal Reserve reduced rates, and a weakening labor market, the S&P 500 logged a 7.79% increase (1). Fixed Income rallied with the Moore F.S. largest bond holding (iShares 20+ Year Treasury Bond ETF) increasing about 1.27% within Q3 (as of 09/30/25) and paying another nearly 1% dividend for the quarter (2). With stocks and bonds rallying together over the last quarter, I’ll discuss market moving events within the quarter, lay out my opinion of how investors can consider deploying capital in a highly valued market, provide trading ideas, and discuss our thoughts on why U.S. markets are priced at a premium globally. Tasked with fiduciary* management of hundreds of accounts, Moore F.S. is always strategic about your investment holdings, and attempts to strike a solid balance of risk and reward within each account. The gray-haired veteran’s account looks far different from the client born this side of the new millennium. To support this strategy, we believe that interest rate policy and trajectory can be the easiest variable to monitor regarding the decision making of portfolio construction, which Moore F.S. is proud to do “in house”, instead of using high-cost mutual funds for example. This Exchange Traded Fund oriented strategy typically results in the older client’s asset allocation being constructed of stocks and bonds strategically, and the client of the “new millennium” hosting strategy that is more related to the capitalization of stocks. In other words, in the average environment, Moore F.S. tilts younger portfolios more to small caps (using smaller companies instead of the large ones like you’ll find in the S&P 500). To oversimplify, Moore F.S. set portfolios up to help them better perform when rates fall. We feel strongly that the active management of passive ETF’s can help ensure you’ll have solid asset allocation without using actively managed mutual funds which typically lag.
The stock market carousel continued in the second quarter of 2025, with some investors jumping off, while others jumped aboard. Aiming for a solid return to follow a negative 4.59% Q1, the S&P 500 slated a 10.57% return for our second quarter (1). During this most recent quarter, I leaned on my beliefs mentioned fifteen months ago in my Q1 2024 Moore Financial Solutions review; “we feel that investors unknowingly become more faithful in broad U.S. equities to recover after a downturn.” In that previous review I offered a thought that investors have become more trusting that markets will recover after seeing it happen in the 29 historical bear markets, as compared to the first ever bear market, for example. Though my continued theory is that the average bear market duration will decrease over time (with younger investors portfolio managing more assets and algorithmic trading increasing), even I was surprised by the minor 83-day bear market speed bump that the S&P 500 shook off, given that prior to this the average bear market was 289 days (2). The S&P 500 would go on to close Q2 both positive for the year and at record highs. In this quarterly review we’ll look at how bear markets are rarely the same and how our strategy must evolve. We’ll discuss a stubbornly high interest rate, our positioning for potential interest rate decreases, and global matters affecting the market. It’s been said for years that the stock market takes the escalator up and the elevator down. But why? Simply put, this is the result of the driving forces of selling and buying stocks. If investors are optimistic, they’ll commonly allocate to the stock market in an attempt to grow their money. But too much of this buying is deemed greedy and is a great evil of long-term investing. If investors, however, are fearful, they’ll sell their stocks, (at least the less emotionally committed, shorter term investors), driving the price of stocks lower. We believe Q2 is a great example of the battle between fear and greed, and the only real concern is being wrong on predicting short-term market movements. Over the first six trading days of Q2, investors sharply drove the S&P 500 about 11.2% lower, with panic fueled by President Donald Trump’s April 2nd liberation day announcements (3). A resilient S&P 500 would heal the 11.2% wound in only 17 trading days, leaving behind investors who may have been scared out of the market near April 8th closing lows on the S&P 500 of 4,982.77 (4). This would be the first and only closing price below 5,000 on the S&P 500 from April 20th, 2024, to today’s July 1st, 2025, date. In our opinion, this supports our thoughts regarding algorithmic trading, which likely conducted heavy buying at levels of support below 5,000. April 9th would serve as the third largest one-day gain for the S&P 500 in history, increasing by about 9.5% (5). We view the sudden announcements and emotional reactions in the stock market as a great reason to stay the course in our investments. By staying focused on our long-term perspective, while short-term winners and losers argue over the current price, we’ll be less likely to panic and instead willing to accept an average return, rather than attempt to outsmart the market. Moore F.S. was able to capitalize in some situations by selling bonds and buying stocks, when appropriate. While it is not fully determined who lost what, it is implied that a portion of investors locked in losses in Q2, by panic selling with the herd mentality near April 8th lows. These investors would, as a result, miss out on what would become a fruitful Q2 for those willing to wait the required 84 days and not be emotionally rattled.
