Although I believe most of you are not panicking, not worrying and not standing on the window ledge this time around, I’d like to share some of my recent thoughts on the markets, economy and what’s going on. (I have also made a bet with Anka that I can keep this to three paragraphs.)
Glass half empty?: Ukraine: gas price inflation, political unrest, fear, worry, and inflation of food costs later this year and beyond. Core inflation: showing up recently around 8-9%. The FED: raising rates, vowing to control inflation, risk of pushing us into recession. Bear market: S&P500 down 17% (hit -20% midday Friday (5/20/22), NASDAQ -27% (has been off over 30% recently), Bonds (The Bloomberg Barclays Capital U.S. Aggregate Bond index) down around 10%*. We have essentially hit a bear market and I expect us to bounce along in this range for a while. Earnings: can they hold up? China: we’re always worried about China. COVID: resurgence? (I believe this worry and risk is dissipating). Supply Chains: still struggling but improving. And, of course, “fill in the blank”.
Glass half full?: Do the math. Why is there inflation? Fed Monetary policy as well as Fiscal policies from both parties have pumped massive amounts of liquidity into the system over the last several years, particularly since COVID began. That cash is bleeding through. During COVID, most of us stayed home, didn’t travel, didn’t lose our jobs, and didn’t spend much money for two years. Is your bank account healthy? Personal savings are at record highs and we are coming out of the shutdown and spending with a vengeance. It began while at home when we all called the same contractor to put on an addition to our house, or replace furniture, build a deck, you name it. Purchases of new computer equipment, Peletons, washing machines, etc. went through the roof at a time when factories were shut down. So supplies could not keep up with demand. Now we want to fly away on vacations, book hotels, have memorable “experiences” and spend on services. The economy is cooking and that should be great news. However, we are seeing inflation. The Fed is moving to slow things down and the market is worried that the party may be over. Is there anything positive in the future? I believe there is plenty of good news and it won’t take too long for any slowdown to play out.
This is how I see it: First, inflation will likely subside to lower levels, just not go back to the 1-2% that we have been used to. I expect a range of around 4% will become the new “base line”. That will give the Fed the ability to pause at some point. Second, it is possible that we avoid a recession as the economy adjusts to higher rates, slower earnings growth, easing of supply chain problems, increase of supply to meet demand, and continued low unemployment (a.k.a. “a soft landing” and no recession). That said, I am guessing that we do have a recession. Is that the end of the world? No! There are three types of recessions: mild, medium and deep. Is a deep recession likely? Not in my opinion. I am getting a growing sense that we will likely go through a mild recession (2-3 quarters of negative GDP growth), probably in 2024. This will be followed by a recovery, as the underlying fundamentals of the economy are still strong. We have had many mild recessions in the past but nobody remembers them. Is ANYBODY talking about the possibility of a “mild recession”? I certainly haven’t heard it. More importantly, the market is pricing in more of a medium, and possibly deep recession. The market moves well ahead of reality and will likely recover well in advance of any actual recession (especially if there ends up being no recession).
Conclusion: Stick with your plan! In order to benefit from the long-term gains that a diversified portfolio can deliver, you cannot miss the big up days and no one knows when they will happen. I feel that most of the downside is priced in the market already and we are likely to bounce up and down, until the clouds clear and the outlook becomes clearer. This could go on for weeks or months. There will most likely be a “blow off” or panic sell off at some point that will mark an absolute bottom. We shouldn’t worry about that, it won’t last long and we cannot know when or if it will happen. The market will be on the move upward before a soft landing or recovery from recession actually happens and it will likely move very quickly. By staying invested, you may also be collecting dividends as you wait out this volatile period. Lastly, you own high quality companies. Is the world’s population shrinking? NO! It is growing. This growing population will keep buying Crest toothpaste, Tylenol, Heinz ketchup, Coke, and Apple products in larger quantities. We will buy electric vehicles and solar panels and new shoes. Technology in every aspect of our lives as well as innovation in medicine, agriculture, travel, sports and leisure will not stop moving forward. And you own many of the best companies in their fields. Recessions have a wonderful way of resetting prices, squeezing out economic excesses, weeding out the poorly run companies and rewarding the best companies, like the ones you own.
Sorry, 4 paragraphs. I guess I owe Anka a nice lunch. We are looking forward to talking with you soon. Please feel free to call us if you have any questions or would like to discuss your plan in more detail.
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners Wealth management or its affiliates. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
An investment cannot be made directly in a market index.
The Standard and Poor’s (S&P) 500 index tracks the performance of 500 widely held, large capitalization US stocks.
The NASDAQ Composite index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.
The Bloomberg Barclays Capital U.S. Aggregate Bond index measures the performance of the U.S. investment grade bond market.
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