Broker Check

The Manley Macro Memo

October 31, 2022

The Fed's mistakes created the worst year for balanced investors since the Great Depression. Is the worst over?


  • Historically, the 60/40 blend of stocks and bonds (our benchmark) has reduced portfolio risk and maintained most of the stock market's reward because stocks and bonds have a low correlation. Also, in periods of recession or financial stress, bonds act as a safe haven and typically appreciate when stocks fall. In fact, since 1928, there were only five years when both stocks and bonds declined.

  • Unfortunately, the 60/40 blend is having its worst year since 1931, when the U.S. was in the Great Depression. While stocks are in a "normal" bear market, the bond market is having its worst year on record. This year, the stock and bond market's poor performance is due to the Federal Reserve's reckless monetary policy.

  • To stabilize the economy during the Pandemic, the Fed cut interest rates to zero and printed approximately $4.8 trillion to buy bonds and fund the government's massive spending programs. The Fed waited until this March to raise interest rates to 0.25% and terminate its bond-buying program – unfortunately, inflation was already 8.6%, which was a 40-year high.

  • Next, the Fed aggressively raised interest rates to fight inflation, which drove the U.S. Aggregate bond index down 16%. Also, the S&P 500 declined by nearly 30% as valuations plummeted due to higher interest rates. In this period of stagflation (high inflation, rising interest rates, and slowing economic growth), all asset classes plunged (except for energy and the U.S. Dollar).

  • We believe the period of stagflation is ending, and the economy is entering a recessionary period of declining growth and inflation rates. We are invested in the market's defensive sectors, U.S. Treasury bonds, and gold, which have historically performed during recessionary periods. Since stocks remain overvalued and Wall Street earnings expectations seem unrealistic (14% profit growth in 2023), we will continue to focus on preserving capital and reducing portfolio risk.

  • Our base case this year was a market low of around 3200 near the mid-term election. It appears that the market low for this year was on October 12th, when the S&P 500 fell to 3491. We expect favorable seasonality, corporate buybacks, passive inflows from 401k's, and declining volatility to fuel a market rally into the New Year.