Seriously, good riddance to September: Between this bloodbath of a market during the day and “Dahmer” on Netflix at night, no one would blame you for feeling a sense of hopelessness as we head into the final quarter of the year. Closing out the week, the S&P 500 was tracking for about a 9% decline in September and slightly greater than 5% for the third quarter. The Nasdaq lost about 10.5% over the past month, bringing its quarterly loss to roughly 4%. Both indices are on pace to lock in their worst September since 2008. September is historically the worst month of the year for the market. The Dow Jones Industrial Average also ultimately fell into bear market territory this month, falling nearly 9% in September and over 6% in the third quarter. Not only was this worst month for the Dow since March 2020, it was its worst September since 2002. That means this past month for the Dow was worse than September 2008 during the financial crisis.

For the quarter, the real estate and communication services sectors performed the worst, falling over 11% and 12%, respectively. Consumer discretionary and energy were the only two sectors to finish out the quarter with gains of just over 4% and 1%, respectively. As for September, no sector managed to escape the carnage, with all 11 looking to close lower for the month, led to the downside by real estate, communications services, technology and utilities.

The drivers of the price action in stocks heading into October remain largely unchanged, with inflation behind the wheel and uncertainty around China’s path to reopening and Russia’s ongoing war in Ukraine riding shotgun.

Inflation and the Fed

As a result of inflation, we are seeing a swift reversal of the easy money policies — low interest rates and quantitative easing — that helped support risk assets for over a decade and most recently during the dark days of the pandemic.

Unfortunately, this monetary policy reversal does nothing to address the supply side issues contributing to inflation. Moreover, fiscal policy isn’t helping: The Federal Reserve is seeking to suck money out of the system and put power back in the hands of employers in an attempt to cut wage inflation, while Washington has introduced several more simulative initiatives that would increase the amount of money in the system and add jobs. Though the politicians’ causes may be noble — we love the idea of investing in renewable energy — in terms of the Fed’s fight against inflation, the policies are seen as headwinds potentially forcing the Fed to act even more aggressively than it would have otherwise.

Additionally, the Fed’s tightening cycle, which began with a small interest rate hike in March, has only accelerated into the fall. That’s leading to demand for dollars and causing the U.S. greenback to strengthen relative to other currencies. The result has been a stiff headwind for companies selling into international markets as U.S. goods become more expensive to foreign buyers.

China Covid policy

Uncertainty around China’s reopening from the pandemic continues to weigh on the U.S. stock market because East Asia represents a significant growth opportunity for many American companies.

In addition, political tensions between the U.S. and China over a number of issues, including Taiwan, are leading to a reversal of the globalist agenda that helped keep inflation down — with many politicians now calling for jobs to be brought back to the United States. How far this reversal goes remains to be seen. But supply chains are being reorganized. Some jobs will make their way back to the U.S., especially those tied to industries considered to be a matter of national security. Other jobs may end up in emerging market countries. Apple (AAPL), for example, has begun shifting some production to India and Vietnam.

Russia’s war in Ukraine

Finally, there’s Russia’s unjustified war in Ukraine, which in addition to being a humanitarian crisis, is proving to be a European nightmare. It’s disrupting food and energy supply chains to the entire region. Of course, the energy market is global — and as a result, everyone is feeling the impact of this war at the pump which is contributing to global inflation. The response is threatening a global recession.

What’s the answer?

Should we just take our ball and go home? History would say you stay the course and stick to your discipline. As brutal as this market may be, it’s important to zoom out and acknowledge that over the long term, the reason equities have historically provided the best returns of any asset class is because investors are ultimately rewarded for taking on the risk you experience in a year like this.

In fact, just look back three years — including this horrendous year — and it’s still roughly a 9% annual return from the S&P 500. Over the past five, it’s 9.5% annually. And for the last decade, you’d have a 12% annual return. Don’t let one bad year — and we are not trying to sugarcoat it, it’s really bad — keep you from seeing the longer-term rewards for taking the risk on equities.

Don’t let fear rule

Can things get worse from here? Sure. But don’t let the fear of things getting worse rule your investment decisions. Even if we do go a bit lower, we would still be well within the parameters of an average bear market.

The absolute carnage we have witnessed at the individual stock level is providing some of the best opportunities we have seen in years for those who can stomach further volatility and stay the course. Whether your goal is to pick up accidental high-yielders for some passive income or focus on tech stocks conducting monstrous buybacks while trading at some of the lowest valuations in years, we think there are plenty of opportunities out there right now.

It’s not 2000 or 2008

Lastly, for those worried that this is a dotcom or 2008-like crash, we don’t think those are the correct comparisons at the moment.

The valuations coming into this downturn were nowhere near as egregious as what we saw in 2000.

• At the peak of the dot-com bubble, our holding Microsoft (MSFT), the largest company by market cap back then, traded north of 80 times trailing 12-month earnings. Right now, the multiple is in the 20s.

• The second largest General Electric (GE) traded at around 60 times earnings.

• The third largest Cisco Systems (CSCO), also a portfolio holding, was briefly north of 230 times earnings. Now Cisco is trading in the low teens.

• The fourth largest Exxon (XOM) was over 35 times earnings. Now it is mid-single digits.

• The fifth largest Walmart (WMT) was trading at nearly 60 times earnings. Now it is near 20.

The biggest companies — those that have the most impact on a market cap weighted index like the S&P 500 — were in the stratosphere back then, nothing like what we saw coming into 2022.

As for those wanting to compare today’s environment to the Great Financial Crisis, the biggest difference is that our financial institutions are much better capitalized than they were back then.