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.
About thirteen years ago when I started my career as a Financial Services Professional, I was almost instantly astute to the number one factor that determines client success. Of course, this determination was solely my own opinion. I’ve never turned on CNBC and heard scientific data backing it and likely never will. You can nearly ignore researching passive management vs. active management, throw out a comparison of exchange traded funds vs. mutual funds, and forget all about whether a Roth IRA or Traditional IRA suits you best. I believe the number one determinate of success that a client must have is “Proper Expectations”. It is by no coincidence that I believe Moore Financial Solutions clients have extremely reasonable, and ultimately the proper, expectations regarding investing. Investing long term is no casino, rather a patient approach to creating current income and future earnings. Prior to gaining licensure to be on your side financially, I know people that panicked and sold their entire portfolio and moved to cash positions in the Great Recession of 2008-09. They told the story years later to me regarding the vast missed opportunity and harm in locking in the losses. Imagine an investor panicking in Q1 of 2009 and selling stocks below 700 on the S&P 500, an index that is about eight times higher today at 5,635 (1). The S&P 500 would see gains of over 75% in the eleven months to follow, peaking this client’s FOMO and desire to get back into the market, only to sharply drop 16% over the next two months (2). My advice to you, and the number one way I can help you with your investment success, continue not being like this example investor. But rather, stay rooted in your investment philosophy. Realistically, the stages of someone’s investment life are humorous. We typically have little money early on, and it is easy to overcome the emotional impact from the money movement (a 10% decline in a portfolio of $2,500 might equate to a couple days’ earnings). But the problem is, there aren’t ample funds in that portfolio to provide life-changing growth either. For example, last year’s approximately 25% increase in a hypothetical S&P 500 index would have added only $500 to that portfolio. You want to play in the big leagues? Think you can handle the emotional impact of stocks and bonds? Try having an account of $750,000 or $1,000,000. You might want to pick up a fun hobby known for reducing stress, because there are going to be times when your portfolio hits rough spots. But there is good news too. Mathematically, just a 5% return on one million dollars is a gain of $50,000, and the reward for taming the emotional torment is much greater. Sadly, Q1 2025 was a great month to lean on those stress-reducing hobbies because the S&P 500 moved 4.59% lower for the quarter (3). Additionally, the S&P 500 moved 8.66% lower from February 19th, 2025, to the end of Q1 (4). Though the 4.59% has some sting to it, moving down nearly 9% in 40 days undeniably tests the emotional resilience of an investor, and we understand this firsthand. We are excitedly moving forward with this quarterly review to discuss what moved markets, tariffs, and what opportunities may arise. Without question, Wall Street found it very difficult to plan around the Trump tariff shifts. On January 26th, 2025, President Donald Trump announced a 25% tariff on Columbian imports as President Gustavo Petro attempted to decline inbound Columbian migrants. Petro retaliated with a 25% tariff against United States made imports. Shortly after, Petro begrudgingly received the migrants, and the trade dispute 2 ended, providing our president a quick trade war win. Moore F.S. believes this quick victory would go on to fuel President Trump’s confidence using tariffs as weaponry. On February 1st, 2025, President Trump laid the foundation for a 10% China tariff and 25% tariffs on Canada and Mexico. Just two days later the president would signal a 30 day pause on each of our neighbor’s 25% tariff (5). These back-and-forth movements continued off and on for much of the first quarter, with many tariff strategies subjecting only specific industries, e.g. automakers or steel producers, creating not only volatility in the broad stock market but especially within specific industries caught up in the talks. President Trump has labeled April 2nd, 2025, as “liberation day” signaling a big event. Throughout this back-and-forth, Moore Financial Solutions has made every effort not to be on the “wrong side” of the trade and has remained well rooted within our equity portfolio, when appropriate. We view, as mentioned in previous quarterly reviews, the volatility within the stock market as the “cost” or “price” paid emotionally to be able to receive the effective returns stocks could offer. In greater detail, rather than Moore F.S. attempting to time markets or predict the president’s next move and potentially being wrong, we’ll ride the storm out. Although Moore F.S. does not predict a bear market (described as a move down of 20% in the stock market), we point to the resilience of the stock market, overcoming all 29 previous bear markets and having done so rather quickly, taking an average of only 289 days to recover from the drop (6). Though we can’t rely on past market performance to guarantee its future, we believe this reaffirms our approach to using the stock market for clients with a long enough time horizon and ability to pay the emotional “cost” of seeing a portfolio move lower. Moore F.S. has theorized in past quarterly reviews, with no data to back it up, algorithmic trading (computers buying stocks at a “floor” or low point which might give the market support), and a trend of increasingly younger portfolio managers who have only seen speedy recoveries and long bull market rides might reduce the average bear market duration.
It is with great pleasure to work as your trusted advisor for another year! We hope you and your family had a Merry Christmas and you’re headed into a Happy New Year. To the surprise of some other financial firms, the stock market created sizable gains in 2024 with the S&P 500 increasing 23.3%, ironically within 1% of the year prior’s 24.23%. Additionally, that same market index returned a modest 2.06% in the fourth quarter of 2024, with all figures mentioned not including dividends (1). With Q4 of 2024 hosting one of the biggest elections of our lives, at least as described by some, we plan to discuss how our money management strategy evolves. We proudly stayed true to our strategy and didn’t decrease our allocation to stocks, while many other firms were selling covered calls and reducing their allocation to stocks as they incorrectly predicted a downturn in the markets for 2024. Even if you were living under a rock, you were likely informed that Donald Trump is headed back to the White House. We reference this change with the understanding that the leadership of current President Joe Biden is quite contrasting to the leadership we’ve seen from Donald Trump in the past, and his campaign promises. The Federal Reserve seemed to have had to slightly adjust their projected pace of rate cuts with the understanding that Trump will be more favorable to the economy through deregulation, corporate tax cuts, and repatriation of jobs. These factors, along with the deportation initiatives, may reignite inflation in the short term. The Center for American Progress puts the undocumented immigrant population in the United States at around 11.3 million, with 7 million of them working (2). To make matters worse, many of these jobs are considered “difficult to fill” and/or “less desirable jobs”. We believe the Federal Reserve felt the need to signal plans to slow rate reductions, after reducing rates in 2024. In September, the median projection for the end of 2025 implied four more rate cuts next year, but the median projection from December’s meeting only projects two more cuts (3). Below is the Federal Reserve’s dot plot, which is a chart that visually represents each member of the Federal Reserve's policymaking committee's projection for where they expect the federal funds rate (the benchmark interest rate) to be over the next few years.
