One day the U.S. stock indexes are up big in a 2% rally and the next day they give it all back. The markets are watching the news and bad news is good and good news is bad. That is how backwards the whole situation is. If the economic news is good, then the Federal Reserve will have to raise rates more quickly so investors should sell stocks. Conversely, if the economic news is bad, then buy stocks because it means the Fed won’t have to raise rates as much. Of course, this is an oversimplification of what’s going on in our markets, but this backwards thinking is one of the driving forces moving our markets right now.
Most of the big investment companies have thrown out their warnings of economic storm clouds on the horizon. Jamie Dimon the high-profile CEO of JP Morgan Chase used the term “hurricane” for what he sees coming at our economy and markets. Dimon cited Russia’s invasion of Ukraine, inflation and higher interest rates. To that string of negatives, we can add a pronounced deceleration in world growth forecasts and a Chinese economic performance so anemic that it could lag behind the U.S. for the first time in almost two generations.
In our opinion, there are quite mixed economic numbers that show a muddy picture filled with many unknowns rather than an obvious economic recession. An obvious example of this bad retail sales numbers from Target, Amazon and Walmart – yet the last employment numbers from the BLS were very strong. Year over year wage increases are quite good at 5.2% but yet the individual saving rate as a percentage of income is very low. Take a look…
That chart doesn’t instill confidence in the future of the economy, but hopefully at least some of the lack of savings is due to some commodity price increases that may abate in coming quarters. Right now, many people have already braced for some version of an economic slowdown varying in opinion from a mild recession to a total Armageddon. Assets have been sold, expectations lowered, expansion plans delayed, etc. Certainly, Jamie Dimon doesn’t wait until AFTER he tells the market a hurricane is coming to sell stocks and tighten up his portfolio. The point being that many times when estimates look so bad, things tend to get better. When so many investors are sitting on so much cash looking for a home, there is always resistance to markets selling off precipitously. Obviously, there will be a price to pay for the ridiculous fiscal and monetary stimulus provided by our “leaders” during Covid. But no one knows what the timing of that will be – and of course, the big unknown, is how much the Federal Reserve actions accelerate the slowdown. If the Fed keeps raising rates and selling assets back out onto the markets which they bought them from over the last 2 years, eventually at some point something will break. Of that we are certain. We don’t see much different from previous cycles of Fed generated booms and busts, except maybe how much of a hair trigger the Fed has to lay off tightening and go back to easing monetary conditions. If it feels too much like a Russian roulette for you, raise some cash on the current rally – but don’t sell your gold…
Regards and good investing,
Greyson Geiler