Spring, a new awakening
Let’s just be honest. Most of the early Spring has been a bust. Cold weather, extreme winds, and the persistence of cloudy conditions had us down. But this is New England and if you wait a couple of minutes, all will change.
We are almost to Memorial Day, the weekend that changes everything. May turns to June when we have the most beautiful days, and the growing season erupts into spectacular vistas everywhere. Take heart and go enjoy! This is our cherished four-month window to live like those lucky folks five hundred miles to the south. For me, it’s time to head outdoors, sit on the deck, consume great local seafood, and hoist a cold beverage. For you, just make your list. And go at it and …enjoy! You have earned it.
What is going on in the markets?
In previous newsletters, I began talking about market changes that portended moving away from a three-year bull market. A year ago, I wrote that market rotations were occurring that showed that support for growth stocks was declining. Six months ago, I wrote about the impact of higher inflation and cracks in the supply chains for many goods and commodities. Most recently, I commented on the start of the Russian-Ukrainian war, and the possible impact of global sanctions on the Russian economy.
Today, I want to report that those cautionary tales have now yielded a bear market in most stocks, and the bear now has the bond market in its grip as well. So, is it time to be pessimistic about the state of the economy and the markets? The answer is yes and no.
Yes, the markets have declined…the Standard and Poor’s 500 largest company index is now off more than 18% on the year. The Nasdaq (home of many growth stocks) is off 27% year to date. Bonds have taken a beating at the same time. These moves are based on five occurrences:
1) Inflation, once thought to be transitory, is now fully entrenched in the economy. Inflation is somewhere between 9% and 11% year over year (the highest we have seen since I had brown hair!).
2) The Federal Reserve Board has moved aggressively to address inflation by beginning an interest rate hiking cycle that may extend into next year. Higher rates are designed to slow economic growth and thus lower demand for goods and services, hopefully in line with available supply. Demand in line with supply will yield inflation less than 2% per year.
3) Supply chain issues are still with us and in many respects growing larger. The Russian sanctions are one reason. Another is that China continues to have a zero-tolerance policy concerning Covid, resulting in economic shutdowns that are very disruptive.
4) The Russia-Ukraine war is far more competitive than originally forecast and may drag on for an extended period. The impact on energy and agricultural markets is pronounced.
5) The American consumer has been resilient, mainly due to government stimulus during Covid. That stimulus is now ending and the markets project that corporate earnings will decline in the ensuing months.
Well, that is quite the list of negatives! What about the positive news?
1) The U.S. Gross Domestic Product (GDP) is a measure of economic health. Today, the GDP growth rate is at 3.9%, a very strong rate.
2) The U.S. labor market is robust. The unemployment rate is at 3.8%, an indicator of a full-employment economy.
3) Corporate earnings as measured in our current quarterly earnings reports are running at 9% above last year’s levels. Corporate guidance for the future three to six months is positive for most large corporations.
4) The U.S. consumer is still spending. Whether the withdrawal of stimulus and higher inflation will affect future spending remains a matter of debate.
5) Innovation continues to spawn new businesses in the U.S. at a phenomenal rate. We continue to be highly productive and new jobs are being created daily. We do not have enough workers to fill those jobs, so that may dampen the impact of innovation.
Consequently, we have some headwinds that make economic growth more difficult. Nonetheless, we have the best set of tailwinds in the world that suggests that we will be well-positioned for the next decade. Please expect some bumps in the road, but the long-term prospects for America are good as far as the eye can see.
Recession around the corner?
The answer is very likely, yes! A recession is defined as two straight quarters of negative growth in the economy. As a rule of thumb, we have some sort of recession every four years. It has now been since 2018 that we had a short-lived recession. So, we are about due.
However, my view is that we will not enter a recession in 2022. The strengths cited above are likely to ensure that 2022 will show continued growth.
2023 is another matter. If inflation is not lowered in the next year, the Federal Reserve decides to raise rates above 3%, and the issues with Russia and China noted above are not resolved, then a recession is likely. It may not be a lengthy recession, but it will be noticeable. Our ability to restart our economy is robust, so I would be opportunistic about our chances to get by the current hurdles and get back to economic good times.
That said, the stock and bond markets have spoken. They both are saying that there is an elevated chance of recession, and lower corporate earnings. Please be aware that the markets are merely an expression of human emotions, and emotions can be wrong. In the meantime, it would be prudent to expect lackluster markets for the next several months, at least until clarity arrives on many of the issues cited above.
With the market decline, this is the ideal time to boost your 401k/403b contributions. With every dollar that you contribute to your retirement plan, you will be able to buy more stock shares since prices are now lower. This is the essence of the ideal dollar-cost averaging strategy. So, please revisit your contribution plan and adjust upward where possible.
Required Minimum Distributions from IRAs and other retirement plans are a fact of life for many clients. If you have not done so, now is the time to replan your withdrawal rate and the timing of those withdrawals. Please schedule a review today to talk to your Financial Advisor to sharpen the strategy.
We notice that some clients are postponing their annual review meetings, perhaps because of the down market. We encourage everyone to set a time for the review…a bear market is a time when you can perhaps get the most value out of your annual review!
Post-Pandemic Opportunities. Now is the time to book your schedule with all the activities that you may have postponed over the last two years. There are free concerts, indoor and outdoor plays, and town-sponsored events that promise fun and sunshine. Whatever way you wish to participate, we recommend highly that you get out and do what you like to do. The physical and mental benefits are worthwhile.
We include an addendum to this newsletter written by Ben Beck, the architect of Beck Bode’s investment strategy. Please take a moment to read Ben’s thoughts on the current state of the market and how an investor can best handle the volatility in the market.