May 1, 2022

May: Markets Are Cyclical

Compass, map, and telescope on white background

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At a Glance

  • 12 year old raises $325,000 for Ukrainian kids
  • Markets are cyclical not linear, setting up peaks and troughs
  • Interest rates are on the rise affecting stock, bond, and real estate markets
  • Analysts are forecasting a high probability of a US recession in the coming 4 to 8 quarters

Seeing The Good In a Season of Bad

With all of the challenges in this world we can see plenty of good if we are looking out.  Today, I will share some good stories and some financial insights I have as I look out into our world and the financial markets.  I love reading stories of people making a difference.  One example is Gabriel Clark who used his woodworking skills and social media to raise 325,000 for kids in Ukraine. 

A Peek At The Markets

Sometimes we need to pause and remember something very important: “Markets are not linear, they are cyclical”.  Bob Farrell said this earlier this week. Stock bond and real estate markets will move up and down with noticeable peaks and troughs.  The peaks and troughs are very noticeable after the fact.  What’s difficult about market cycles is how we feel when we are in the middle of the beginning or ending of a cycle.  This is the hardest time to be an investor as fear is dissolving our inner resolve.  Because of this dynamic, I recommend maintaining a long-view of markets, having a strategy before hand, and sticking to the strategy to survive the down cycle/trough to arrive at the upcycle is very important.   

Interest rates have continued to rise reducing bond prices and causing mortgage rates to quickly rise.  Average 30-year mortgage rates are now above 5% making them the highest mortgage rates we have seen since 2011.  This will most likely start to put some pressure on the lofty housing prices.  In addition, higher treasury, corporate, and high yield bond rates are higher putting pressure on the stock market.  The April stock markets are testing the lows we saw in February.  Bonds are also down cycling year to date which has made 2022 a difficult investment environment. 

Searching Through Our Present Economy

Why are markets so volatile?  Is it Ukraine, the feds, inflation, supply chain issues, no government checks in 2022, lofty prices?  All of these have an impact but I would say the single thing that I look for is the messaging from the US Federal Reserve.  The Federal Reserve is in a difficult spot where they must fight inflation by raising rates without putting our economy in danger.  Unfortunately, they have a very bad track record of creating a “soft landing” so the economy can keep growing. 

Alex Domash and Lawrence Summers recently posted on the National Bureau of Economic Research website some analysis on the difficulty of creating this soft landing in our current environment.  They look at the unemployment rate currently as well as the inflation rate and the probability of a recession.  They say, “Since 1955, there has never been a quarter with price inflation above 4 percent and unemployment below 5% that was not followed by a recession within the next two years.”  I believe the fed will accomplish its goal of reducing inflation, and I also believe that in the process they will cause a recession.    

A Look Ahead

Remember, reward is commensurate with risk and doesn’t come easy.  Investing isn’t as easy as buying when you feel good and selling when you feel bad.  Markets are cyclical and we must move from financial summer to fall to winter before we experience the awesome planting season of spring.  I love this time of year watching all the shrubs and trees begin to show life again.  If we didn’t have different investment seasons, investing would be boring, and I would have a different vocation.  I learned a good saying while at Edward Jones 15 years ago, “If you feel like throwing a brick through my window, make sure to attach a check to it as it’s probably a good time to buy." Recently, Paul Roberts, a 94 year old military veteran escaped a fire in his home.  I’m sure that he felt all the bad feelings of losing something he was fully vested in.  What made the difference is his neighbors came together to help him rebuild. [Read More]

I expect markets to continue to be uncomfortable; I am committed to your long term goals and appreciate your trust as we journey through a change in season. Your situation is unique, please call me with any of your specific investment, retirement or tax planning needs.

Written By Sean West, CFP®

Disclosure

This blog reflects the personal opinions, viewpoints and analyses of the White Cloud Wealth Management employees providing such comments, and should not be regarded as a description of advisory services provided by White Cloud Wealth Management. The views reflected in the blog are subject to change at any time without notice. Nothing in this material constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security.