By Kevin Theissen
It has been an interesting start to the year, not only for stocks, but bonds have taken a hit too, leaving investors with fewer short-term options.
The Fed’s stance, interest rates, high inflation, lockdowns in China, the Russia/Ukraine war, and fears of recession have all influenced this rough start for investors.
The tech-heavy Nasdaq is well into a bear market, and the S&P 500 lost 18% from its high through mid-May. Historically, corrections have been defined as a drop of 10% and bear markets 20% or more. Whether this leads to recession or not is up for debate.
The Fed raised rates by 50 basis points during their May meeting and has signaled another 50 basis points this summer.
Company earnings reports have shown that profits have been strong. However, when adjusted for inflation it may not be enough right now. Many times, people tend to focus on the big, newsworthy issues but there are upbeat numbers that have cushioned the downside.
Consumer spending has been up six of the last eight months including three consecutive increases through March but much of this spending is from cash saved from stimulus payments. Real disposable income has been down 11 of the last 12 months. Income is up but isn’t keeping pace with inflation – an example of this is that consumers are going into savings for higher fuel prices.
Recession talk has accelerated recently, and Bloomberg suggests that the odds of a recession over the next 12 months is 30%. Others of course reject this and don’t see recession at all for this year. Leading indicators are not pointing to a recession. A fed funds rate of .75% to 1% is likely to be stimulative. The 10-year/2-year bond rates inverted and contributed to the recession talk but it was only for two days and has now normalized. The 10-year/3-months has not inverted and is not approaching an inversion. Consumer sentiment also remains strong.
As always, there are headwinds, most notably higher oil prices and stubborn inflation while incomes aren’t keeping pace. But we’ve been here before and investors need to stick with their plans, stay diversified, take opportunities when they can, buy into or rebalance on dips and maintain focus on the long term.
Kevin Theissen is the owner and principal of HWC Financial in Ludlow.
