This Recovery Might Be U-Shaped

Investment markets swing like a pendulum: between euphoria and depression, between celebrating positive developments and obsessing over negatives, and thus between overpriced and underpriced… This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at a “happy medium.” One thing of which we can be sure is that extreme market behavior will reverse. -Howard Marks, Founder of Oaktree Capital Management

It continues to be a challenging year for global capital markets. The S&P 500 index entered bear market territory (down 20% from highs) in June, rallied back more than 15% into August, only to fall again and close at new 2022 market lows on September 26th.[1] Additionally, bond markets have experienced stresses not seen in decades, putting blended stock & bond portfolios on track to post one of the five worst performances in more than 100 years.[2] We wrote in late June that a combination of high levels of inflation and the response of policymakers like the Federal Reserve (“Fed”) were driving forces of market losses during the year. This continues to hold true – the stubbornness of inflation has led the Fed to hike interest rates at a pace not seen in decades,[3] and capital markets are generally quite sensitive to/impacted by interest rate changes.[4] In June, we also noted a rising risk of a mild recession and prolonged 6-18 month bear market, and our minds haven’t changed there. The fragility in the markets and broader economy today cannot be overlooked. While the market recoveries experienced in late 2018 and the first half of 2020 were swift or what one might call “V-shaped” recoveries,[5] we believe this recovery could be much more drawn out or “U-shaped” as the task of bringing inflation back down to the Fed’s target of 2%[6] seems to us a longer process.

Nobel Prize-winning research by Daniel Kahneman and Amos Tversky in the late 1970s found that ”…the pain of losing is psychologically about twice as powerful as the pleasure of gaining.”[7] And so it’s natural for investors to pay more attention to their portfolios during times of market stress, with some worrying the money they’ve worked so hard to save is at risk of a major, irreversible loss. However, both capital markets and the economy have a long and demonstrated track record of resiliency[8] through what we believe were more challenging times than we are experiencing today.

As noted by Mr. Marks above, the pendulum of market sentiment inevitably swings from euphoria—as experienced in 2019 and 2021[9]—to depression and obsessing over negatives—have you noticed headlines lately?[10]—and back again. This inevitability of distressed market environments is the very reason Sapient takes a defensive approach in building diversified, global portfolios. We believe managing and minimizing downside risk is a critical component of prudent long-term wealth management, and that if we diligently and patiently manage portfolios through the hard years, the good years will take care of themselves.

All of us at Sapient thank you for allowing us to serve you, and we continue to work tirelessly to warrant the trust you have placed in us.


1. CNBC, September 26, 2022,

2. Morningstar, September 19, 2022,

3. NPR, September 21, 2022,

4. US Bank, July 21, 2022,

5. Business Insider, August 4, 2022

6., September 21, 2022

7. Behavioral Economics: Loss Aversion

8. Barrons, December 27, 2021

9. A Wealth of Common Sense, January 1, 2021

10. CNBC, Sept 26, 2022

Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitutes the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results. Indexes, such as the S&P 500 Index, are not directly investable.

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