Market Bulletin: The Perfect Storm (audio included)

Dear Clients and Friends:

As you know, the markets are experiencing one of the worst years in recent history.

Indeed, a multitude of factors have created a ‘perfect storm’ that is exerting tremendous pressure on both the stock and bond markets:

1. The Fed’s commitment to raising interest rates is contracting company valuations, crushing bond prices, slowing economic growth, and creating unemployment, which could potentially cause a recession.
2. Major supply chain disruptions – legacy of the COVID-19 pandemic – persist and have not been solved, which is causing the price of goods and services to increase all around the world.
3. The “Great Resignation” has led to severe labor shortages in many sectors, which means that employees enjoy greater bargaining power, which is causing wage inflation.
4. The war in Ukraine has created a global energy and commodities crisis, causing the price of oil, natural gas, and other commodities to skyrocket.

Inevitably, the record inflation we are experiencing reduces disposable income and forces households and businesses to adopt a defensive approach. As a result, discretionary consumption declines, companies hold off on making important investments and overall economic activity suffers.

The question everyone is asking is: are we in a recession?

Well, that depends on who you ask.

The US government claims that the two recent consecutive quarters of negative GDP growth were not bad enough to say we are officially in a recession. It points to the strong labor market as an indicator of overall good economic health. Indeed, it seems counterintuitive to say we are in a recession if employers struggle to find workers and wages are rising.

On the other hand, the Bank of England has come out and said the U.K economy has already entered a recession. Indeed, the energy price shocks, trade bottlenecks, declining consumer sentiment and falling retail sales are enough for the Bank to admit a recession has already hit the U.K.

For now, it can be argued the US is faring better than its European counterparts. That said, the Fed has stated that its war on inflation could lead to higher unemployment.

Will things get better or worse?

Nobody knows for certain, but we remain optimistic that the tide may soon turn.

Many analysts believe the Fed cannot continue increasing interest rates forever. First, because government and household debt levels are so high that raising rates past the 4% mark could cause widespread defaults. Second, because rate hikes will not solve the structural issues causing inflation. If these analysts are correct, the Fed will cap interest rates at 4-4.5% and initiate a policy reversal as early as late 2023, early 2024.

This policy shift would cause a market rally.

In any case, I remain convinced that we are simply in the midst of a normal market cycle. While sensitive investors panic sell their assets and seek refuge in the safety high interest savings accounts, those buying the stocks and bonds that have been dumped in this fire sale are the ones who will clean up and capitalize on the market’s reversal.

In fact, both stocks and bonds are starting to look attractive.

Historically, markets find a bottom about three months into a recession, and it usually takes the same amount of time for the government to look back and declare, in fact, that we are in a recession. In most instances, governments declare a recession once it has already passed!

With regards to the financial markets, bear markets usually find their bottom in a moment of grand capitulation – that is, a massive act of “giving up”. At that time, selling volume, pessimism and fear are at an all time high, and no one can see a light at the end of the tunnel. During the capitulation phase, the voices of reason are no longer believed and even the faithful bulls are silenced.

I will not be silent because I have an obligation to say what I believe is true, even in the face of seemingly contrary evidence and fearful emotions.

There is plenty of evidence suggesting that we are at the beginning of the bear market’s capitulation phase. However, if markets continue declining, stock and bond prices will become so compellingly low that we will be faced with a generational buying opportunity – one that is too good to pass up.

This is not our first rodeo.

We have experienced this exact same situation many times in the past. In fact, it can be argued that fundamentals are stronger now than they were during past crises. Thus, we remain calm and distill the same time-tested advice: don’t panic, keep a long-term view and stay the course.

If you are investing for your retirement, continue to do so faithfully knowing that price declines can exponentially increase your long-term profits.

If you are currently invested and no longer adding money to accounts, reinvest your dividends with confidence and do not sell your securities at grossly discounted prices below their reasonable value. This is an FDR sort of time where the only thing we have to fear is fear itself.

If you wish to learn more about investing during recessions, please read Capital Group’s timeless “Guide to recessions: 9 key things that you need to know” that will provide valuable insights and strategies to help you navigate these turbulent markets.

In the meantime, rather than panic and give in to the temptation of trying to time the markets – which is always a losing proposition – I encourage you to take stock of all that is good in your life.

While money is arguably one of life’s most important commodities, we must remember that focusing too much on money and markets creates myopia and the false belief that our mental, emotional, and physical health are dependent entirely upon them. Remember: the markets are merely a tool that helps us reach our objectives. There is no need to panic if we have a sound plan!

Thankfully, we are still awash in abundance and there is no wealth in governments or gold – only the willing industry of people working for and selling products to one another. We are always in a new time, but these fears, panics, and the grasping for the illusion of safety have occurred repeatedly throughout history. I wish you and your family health and happiness, and I urge you to remain grateful for the wonders that life has to offer.

Sincerely,

Brent Forrest & Associates, LLC.

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