Are we headed for a recession?
It has been tough sledding for investors thus far in 2022. Even if the S&P 500 hasn’t technically hit that 20% decline, let’s call it what it is: we are in a bear market and sentiment is down the toilet.
Source: CNN Fear and Greed Index
Frankly, people are scared shitless and think we are doomed.
In times like these, it’s important to remember that this is all temporary. We will get through this. We have the most resilient economy in the world.
Will there be pain points? Absolutely. That is the risk you take when you invest in the stock market. Unfortunately it can’t always be ‘too the moon’.
The Federal Reserve is no longer your friend. They have made it clear that they will continue to raise interest rates until there is clear evidence that inflation is coming down.
Raising interest rates makes it more expensive to borrow money. Which leads to investors and companies making less investments, which lowers demand and drives down prices.
That is the ultimate goal currently: tame demand to bring down inflation.
But raising interest rates can only do so much. It’s not going to resolve the Russia/Ukraine war. It’s not going to force China to let their citizens out of their houses.
Raising rates won’t completely restore supply chains either. However, if they are able to tame demand, this could allow companies to catch their breath and normalize their inventory levels (which undoubtedly has become too high as companies stock piled to keep up with consumer demand in 2020-2021).
This is not an overnight process and will be much slower than any of us would like.
But maybe that’s what this economy needs. A slight reset.
What is a ‘recession’ anyway? It’s technically classified as two consecutive quarters of negative GDP growth.
If you surveyed the everyday American they may categorize a recession as the end of the world, another ‘2008’.
While this can be true, we could also experience a very moderate recession.
Even with all the macroeconomic headwinds we are seeing, here are some bright spots:
Consumers and corporations balance sheets are strong (i.e. flush with cash)
Most homeowners were able to lock in low fixed interest rates prior to 2022, which serves as a great hedge in inflationary environments (as prices rise, your mortgage payments stays the same)
Unemployment is low (3.6% through April) and there is still an outrageous amount of job openings
US public companies earnings continued to grow in Q1 2022
I still expect the wild price swings to continue until we see improvements with inflation, Russia/Ukraine, and the China shutdown.
With that being said, this is an extremely fragile market. We are seeing wild price movements based on headlines alone. So far, it’s been mostly to the downside.
But should we get some optimistic news, we could see an intense move to the upside.
I surely don’t want to be on the sidelines when that happens.
Most of us are not investing for today. We are investing to grow our wealth over the long term. In times like these, I try and save like a pessimist and invest like an optimist.
Even if that means I need to learn to sell at the wedding and buy at the funeral…
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.