At a Glance
- How likely is a recession?
- Are short term interest rates going to go higher?
- Have we seen the bottom of the market yet?
Introduction
With markets caught in a volatile pattern of selloffs and rallies, I thought I'd do a quick round-up of what we know (very little) and don't (a whole lot). Before I begin, I should say: if you're looking for perfect clarity, you won't find it here. From where I stand, the crystal ball looks murky as heck. Jay Powell and company have changed from "Bambi" last year to "Wreck it Ralph" this year. Employment has been strong, commodities have fallen off a cliff, mortgage rates have more than doubled in a few short months, the first couple of quarters this year showed negative growth in the economy, and... the economy is teetering on recession.
As you can see, the economic data strategists rely on is confusing, complex, and contradictory.
How Likely Is a Recession?
We've already seen two negative quarters of GDP growth – that’s the technical definition of a recession.1 However, the official arbiter of recessions, the National Bureau of Economic Research (NBER), hasn't made the call yet because they're waiting to see how long and how widespread the current dip in growth is. There are real risks of a recession all around us, but the overall picture is a mixed bag of positive and negative.2
On the positive side: The labor market has defied gravity and is still creating plenty of new jobs. Consumer services are also looking healthy. Companies don't want to give up employees when they've found it hard to find them in the first place.
On the negative side: Persistent inflation is obviously on everyone's radar, as are the Fed's aggressive interest rate hikes. As the economy recovers from all the distortions of pandemic lockdowns, federal spending, supply chain snarls, and policy changes, it seems hard to believe that we could avoid a recession. So let's be calm, ready, and flexible.
Are Short Term Interest Rates Going To Go Higher?
That seems likely, yes. We would expect the current rate inversion (short term rates being higher than long term rates) to increase further. Despite the optimism of folks who hope for a loosening of hikes, the Fed's monetary policy is likely going to continue tightening (and stay tight) to bring down inflation and keep it down. Slacking interest rates too soon could lead to the lingering inflation problems of the 1970s, which I think Fed policymakers want to avoid.
With the benefit of hindsight, we know that a key contributor to the persistently high inflation in the mid-to-late 70s was the Fed's choice not to aggressively raise interest rates (to avoid triggering a recession).3
Unfortunately, that timid approach ended up failing. The interest rate shock treatment a new Fed chair (Paul Volcker) imposed in the early 80s triggered multiple painful recessions in the pursuit of low inflation. It appears the Fed is engineering a recession on purpose. They will "keep at it" until the job is done. It was hard to come up with a character for the fed, I thought of Chucky, Godzilla, the Kraken, but ultimately settled on Wreck it Ralph.
Have We Seen The Bottom of The Market Yet?
That's hard to say. Historically, the fourth quarter has been positive for market performance.4 However, we all know that the past can't predict the future, and there's a lot of uncertainty on the horizon. We've got inflation and interest rate worries, midterm elections, a war in Ukraine, and energy price concerns. However, we've seen that investors are eager to be optimistic, so we can expect rallies when positive news hits. Sticking to your strategy in these uncertain times is the best course of action as this will take time to play out.
The Bottom Line:
Let's focus on sticking to the strategies we've set so we can see the upside when it comes.
With all the recent news, we can be forgiven for thinking that things are a mess. That everything’s bad or getting worse. If you feel that way, you're not alone. A lot of people feel that way. We're human. We live our lives one day at a time inside a fairly small bubble. And that bubble is easily influenced by daily hassles, headlines, and our own mindset.
I can’t promise you that everything’s going to be great. I can gently remind you that we’ve been in places like this before. As long term investors, we’ve made it through. Maybe a little older, a little wiser, and a little more cautious. We’re not alone in this. I have you and you have me. We’ll take it one step at a time. I'm watching, I'm strategizing, and I'll reach out as needed.
Sean West, Wealth Management Advisor/ 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.