I hope you’re well.
With markets caught in a volatile pattern of selloffs and rallies, I thought I’d do a quick round-up of what we know (very little) and don’t (a whole lot).
(Don’t want to hear about markets right now? I’ve got you. Scroll down to my P.S. for something fascinating.)
I also have a challenge for you at the end, if you’re up for it.
Before I begin, I should say: if you’re looking for perfect clarity, you won’t find it here. From where I stand, I’d describe the crystal ball as looking a little less murky.
The economic data strategists are relying on can be confusing, complex, and sometimes contradictory. Let that sink in
How likely is a recession?
We’ve already seen two negative quarters of GDP growth – that’s the technical definition of a recession.1 Albeit a very lose definition and certainly not a great measure when considering the circumstances. At a minimum I believe we should also factor in, job openings, unemployment numbers, wage growth, and I could go on. However, the official arbiter of recessions, the National Bureau of Economic Research (NBER), hasn’t made the call yet because they’re waiting to see how long and how widespread the current dip in growth is.
There are real risks of a recession all around us, but the overall picture is a mixed bag of positive and negative.2
On the positive side: The labor market has defied gravity and is still creating plenty of new jobs. Consumer spending is also looking healthy. And there are still more jobs available than people to fill them.
On the negative side: Persistent inflation is obviously on everyone’s radar, as are the Fed’s aggressive interest rate hikes. The Fed has suggested they will remain diligent in raising interest rates to fight off inflation. How long will they go down this path and will they break something before they blink, is a very real question.
Good news, we may find out these answers very soon. The next two FOMC meetings are scheduled for November 1st-2nd just prior to the election, and December 13th-14th. We will also get three more Consumer Price Index reports prior to year-end. These five key data points will most likely be key market drivers.
As the economy recovers from all the distortions of pandemic lockdowns, federal spending, supply chain snarls, and policy changes, it seems hard to believe that we might avoid a recession. Honestly, I’m not overly focused on if we do or not, I’m more concerned on matching up client risk profiles to take advantage of what the market is giving us.
In our client meetings we are being asked is it ok to invest right now. My answer is, most likely yes. We are seeing some competitive short-term bond interest rates. It has been a very long time since we’ve experienced these yields. If your time frame is greater than 5 years, equity valuations are looking more attractive today and are more in line with average valuations vs. where they were last December. And thinking back to last December, most people only wanted more risk exposure because the market was doing very well.
Are interest rates going to go higher?
That seems likely, yes. But how many more Fed Meetings with interest rate increases? We’re more than likely on the tail end of rate increases vs. the middle.
Despite the optimism of folks who hope for a loosening of hikes, the Fed’s monetary policy is likely going to continue tightening (and stay tight) to bring down inflation and keep it down. Slacking interest rates too soon could lead to the lingering inflation problems of the 1970s, which I think Fed policymakers want to avoid.
With the benefit of hindsight, we know that a key contributor to the persistently high inflation in the mid-to-late 70s was the Fed’s choice not to aggressively raise interest rates (to avoid triggering a recession).3 Unfortunately, that timid approach ended up failing. The interest rate shock treatment a new Fed chair imposed in the early 80s triggered multiple painful recessions in the pursuit of low inflation. Painful yes, but it did work.
It doesn’t seem likely that we’ll see the same situation today. Why? The Fed’s attitude is quite different, the economy is structurally different, and economists are much more aware of the delicate balance they must strike. We also have a much different starting point for both interest rates and inflation now, vs. 1973.
Have we seen the bottom of the market yet?
That’s hard to say and only fools try to guess. Historically, the fourth quarter has been positive for market performance, plus we need to factor in an election cycle, after a strong sell-off and I think you know what I’m getting at.4
However, we all know that the past can’t predict the future, and there’s still some uncertainty on the horizon. We’ve got inflation and interest rate worries, midterm elections, a war in Ukraine, and energy price concerns. We’ve seen that investors are eager to be optimistic, so we can expect rallies when any positive news hits.
Timing market tops or bottoms almost never works, but what does work is being in the market when it moves.
Bottom line: Let’s not focus on timing. Let’s focus on sticking to the strategies we’ve set so we can see the upside when it comes.
With all the recent news, we can easily buy into thinking that things are a mess and everything’s bad or getting worse. But, if headlines said it’s not that bad and to quit worrying, their ratings wouldn’t be that good. Has anyone else noticed the term “Breaking News” seems to be used every day? Maybe I’m just becoming desensitized to it all.
If you feel that way, you’re not alone. A lot of people feel that way.
We’re human. We live our lives one day at a time inside a fairly small bubble. And that bubble is easily influenced by daily hassles, headlines, and our own mindset.
I can’t promise you that everything’s going to be great. I can gently remind you that we’ve been in places like this before. I became a Financial Advisor in 1997 and in my 20+ years, seen a lot and we’ve made it through far worse.
I maybe a little older, but also a little wiser and hardened to sticking to my disciplined approach. We’re not alone in this. I have you and you have me. We’ll take it one step at a time.
Before I go, I’d like to close with a challenge for both of us.
What are you grateful for right now? What’s good and beautiful about your life and the people around you?
Be well,
Jeremy Ftacek, AIF®
Ftacek Financial Services, LLC.
www.FtacekFinancial.com
P.S. I promised you something fascinating and here it is. Here’s a fun TED talk by a pickpocket who teaches us about misdirection and human attention. Here’s another one on lessons about life from the longest study on human happiness (this one’s worth saving to watch later). What do you think? Did you learn anything interesting to share?
P.P.S. An update on student loan forgiveness. Please sign up for updates from the Department of Education so you can get your application submitted well before payments resume on December 31st. Processing will likely take weeks, so you want to get in as early as possible to avoid paying more on your loans.
1 – https://www.foxbusiness.com/economy/us-economy-shrank-second-quarter-entering-technical-recession
2 – https://economics.td.com/us-quarterly-economic-forecast
3 – https://www.schwab.com/learn/story/is-1970s-style-inflation-coming-back
4 – https://www.cnn.com/2022/10/03/investing/premarket-trading-stocks/index.html
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
Securities offered through Registered Representative of Cambridge Investment Research, Inc., a broker-dealer, Member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Cambridge and Ftacek Financial Services, LLC. are not affiliated. This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult a financial professional for your personal situation. Past Performance does not guarantee future results. Please consider the investment objectives, risks, fees, and expenses carefully before investing. For this and other important information, you may obtain prospectuses for mutual funds, any applicable annuity contract, and the underlying funds and/or disclosure documents from your financial processional. Read this information carefully before investing.
