Time to get out or get in
The mind starts to spin
Markets form bottoms and tops
Who can tell when it stops?
A day in the sun, a day on the run
Isn’t the stock market some kind of fun?
Fret not for this too shall pass
It just seems like an endless morass
Recently the stock market has been more volatile than a teenager’s mood. One day up and another day down, while mostly trending lower since January 2022. This is the first major sell-off since March 2020, the (official?) start of the COVID crisis.
Is it different this time? Yes and no. The market reacts negatively to uncertainty. In 2020, entering a pandemic created a mountain of uncertainty, with confusion over masks, lethality, and proper protective measures.
The market did not like the confusion, so it moved lower. By April the markets were moving up again and continued that mostly upward trend with another slight dip in October 2020.
Enter 2022 and we again have uncertainty. Is there inflation? How high? What will the Federal Reserve do to slow inflation?
The holy grail of investing is selling at the top and buying at the bottom. That grail is as elusive as the other one.
The Federal Reserve (Fed) is mandated to keep maximum employment, stable prices, and moderate long-term interest rates. The Fed, up until recently, kept interest rates far below moderate. To combat inflation the Fed will raise interest rates. This increases the cost of borrowing money, which in turn will slow the economy and inflation, they hope. (See mortgage rates.)
The uncertainty comes in the form of a question. Will the Fed kill the economy by raising rates too high? If the economy slows too much, we will enter a recession. Recessions are not good for companies and therefore not good for stock markets, which depend on companies to make more money each year.
The administration and the Fed ignored the advisors who saw inflation coming in 2021—some of whom were trusted economists in previous administrations. Larry Summers served in the Obama administration. He served as the 71st United States Secretary of the Treasury from 1999 to 2001 and as the 8th Director of the National Economic Council from 2009 to 2010.
Larry Summers is urging Washington to tap the brakes on stimulus—or risk unleashing a serious burst of inflation.
—Matt Egan, CNN Business, May 27, 2021
The administration says “a recession is not inevitable.” This statement does not quell the recession fears felt in the markets. Not inevitable means “still possible.” We have enduring shortages and rising costs in various commodities, rising energy costs, numerous supply chain issues, and companies starting to lay off employees.
The average investor’s return is significantly lower than market indices due primarily to market timing.
What should we do? In hindsight anyone can pick the perfect time to sell or buy. The only other method is by magic 8 ball. Our process of holding steady and rebalancing proved effective in 2020 and we believe it will help portfolios weather this cycle. Predicting markets is a game played on financial news sites, and even with all of their knowledge and inside information, they are often wrong.
The only reason for time is so that everything doesn’t happen at once.
The June Consumer Price Index (CPI), a common measure of inflation, came in at 9.1%, the biggest rise since November 1981. There are many constituents to the CPI, including gas, food, lodging, and even food you eat away from home. I think we are all experiencing inflation in our everyday lives.
What will they do? I believe the Fed will do their best to tame inflation. I believe inflation is going to moderate this month and continue to moderate in August. The wheels are already in motion. We had a great run since 2008 and we will have more good days than bad in the future.
If you would like to discuss our plan for your portfolio, please give us a call.
Inflation is not new. Here is a song from 1946 lamenting price increases.
Listen: Inflation by Zeke Manners
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.