Markets blessed us with another burst of volatility last week and headlines are looking apocalyptic again and this is good news. Why? There’s an old saying on Wallstreet, “When Time Magazine recognizes the Bear Market on its cover, it’s time to buy.” Loosely interpreted, when there is widespread recognition the markets have slipped into Bear Market territory, it’s probably more of a time to buy, rather than sell.
Some folks might think it’s time to bail on markets for the summer, but I’ll tell you why that thinking is a mistake.
First, let’s peel back some layers to explore what’s driving markets. (Want to discuss any concerns directly? Just hit “reply” and let me know.)
The latest selloff was largely driven by concerns about how the pace of Federal Reserve interest rate hikes could affect economic growth.1 The Fed’s “hawkish” policy of rapidly raising interest rates to bring down inflation seems likely to take a chunk out of economic growth. This is intended to slow inflation, isn’t that what we all want?
Is a recession or bear market on the way?
Those are risks we are prepared for and technically speaking, some markets have entered bear market territory and others reached very close levels this week.
While the Fed could manage to execute a “soft landing” and successfully lower inflation without triggering a downturn, its track record isn’t so good. According to Schwab, 10 out of the last 13 rate-hike cycles resulted in a recession.2 Those aren’t odds I’d want to take to Vegas. So what’s different this time you may ask? We’re holding a couple of strong cards: a red-hot jobs market and steady consumer spending.3,4
Could those bright spots fend off a recession or downturn? Very possibly. We’ll have to wait and see.
Are the 70s back?
No, I’m not talking about bell bottoms and platform shoes and for the record I did enter this world under President Ford’s short-lived presidency. I’m talking about “stagflation.” What does that even mean?
Stagflation is a buzzword combining “stagnation” and “inflation” and signifies an economy plagued by low economic growth, high inflation, and high unemployment.5
We experienced this during the 1970s and during an oil crisis. It’s hard to say if it’s going to happen again. It’s definitely a risk we (and the world’s economists) are watching. So far, we only have one out of the three requirements, high inflation. As I’ve said in my prior letters, I believe this is more of a side-effect from the “Grand Re-opening” of our economy, after government shutdowns and pouring trillions of dollars onto the economy as a lifeline. Let me explain in simple terms. If I pay my son a $50/week allowance for his lunch money, gas money, and a few extra things he needs during the week. But I’ve locked him down in his room, so he’s not spending any or very little of the $50 he’s still receiving from me each week and this continues on for months. Any ideas what a teenager may do with an extra $500-1,000 in their pocket when you let them out of their room? Maybe upgrade to a new iPhone, golf clubs, go to lunch with his friends, etc…. I think you get the point, and maybe you’ve done something similar.
However, there are two points that count against a vintage 70s stagflation scenario: 1) that strong jobs market and 2) inflation that might already be peaking.6 In my example above, my belief is the American consumer was locked in their room for a period of time and when we were let out, none of us forgot or were too scared to spend. Open the flood gates… So, let’s not panic because after the consumer has spent that extra saved up money, they’re back to the original budgeted number. Make sense.
Here’s the bottom line (and you’ve probably heard me say it a hundred times): Market downturns, recessions, and volatility happen regularly.
We expect them. We plan for them in our investment allocations. Even though market selloffs are painful, we remember that they don’t last forever. We stay nimble and look for opportunities. Though it looks like we may be in for a rocky summer with more volatility, that doesn’t mean it’s time to hit the eject button.
Instead, we make careful shifts, especially in a rising interest rate environment.
The weeks ahead are very likely to be volatile. I’m here, I’m watching, and I’ll be in touch as needed.
Jeremy Ftacek, AIF
Ftacek Financial Services, LLC.
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