- 9 min read

We Interrupt This Broadcast

When I was a little kid, I can always remember the terrible sound of the emergency broadcast system coming over the airwaves. Like an unwelcome houseguest, it would storm into the living room and grab me by the eardrums. Its only purpose was to tell me something I already knew–severe storms were coming.

This is how it feels for many of us right now.

Over the last few weeks, I’ve noticed how just about every source of financial information has become negative. The infamous leak of Roe vs Wade documents from SCOTUS (a huge story) barely lasted a news cycle because Mr. Market was throwing a massive tantrum. It feels like everyone stopped arguing on social media and immediately checked their investment balances.

Before I talk about where the market may be going, I want to remind you that we’ve been here before. I’ve written about volatile markets many times over the years. You can read some of my previous messages here, here, here, and here.

Market volatility is never fun—unless it’s to the upside. Let’s take a look at what I mean:

The massive drop in 2020 happened incredibly fast. I submit to you that it happened so violently that few people had time to process what was happening.

What was unprecedented was the massive turnaround from the 2020 market lows. You can see in the chart above—the Fed slashed its Federal Funds rate to 0% (coupled with asset purchases) on March 15th, 2020. Roughly 2 weeks later, we saw the first of 3 stimulus packages signed into law.

If you look at the 3 major indexes, the Nasdaq soared. The pandemic forced many workers to become one with technology as we worked from home offices or remote locations. Companies like Zoom, Netflix, and Peloton became household names. Robinhood, Coinbase, and Crypto all showed promise that a new financial universe could be at our fingertips. The innovation was staggering.

Not only was the rapid advancement of technology welcomed by everyone, it was also funded with cheap capital. Younger investors were given a shot at the table, as the government deferred student loan payments and doled out stimulus checks. Apps like Robinhood and Public took to the gamification of investing.

It all worked. At least, it seemed to be working. People were unhappy with COVID and the restrictions placed on our lives, but we were happy with our investment accounts.

What Lies Beneath

In 2020, we had a very contentious Presidential election. The fissures in American political discourse were opened deep and wide by the pandemic. Any debate, no matter the topic, seemed to devolve into name-calling and tribal politics.

Oh– and we STILL had COVID.

When Joe Biden was sworn into office, he immediately took executive action regarding domestic energy and fossil fuels. Laced with political buzzwords like “environmental justice” and “social costs” of certain programs, it was clear that America’s brief moment as a net energy exporter was over.

In addition to his actions on climate, the Biden administration passed another 1.9 Trillion stimulus through the budget reconciliation process in March of 2021. Many Republicans argued that the massive stimulus was not needed–instead the government should be more measured with specific areas of relief.

The economic pleas fell on deaf ears.

The Dems were not done, however. In addition to ARPA, they pushed forward with an attempt to pass a version of the Green New Deal. Joe Machin (now a household name) was a noted holdout from supporting the legislation, which ultimately failed.

During this time– the economy was beginning to show signs of inflation. You may recall the phrase “transitory” being used by many in leadership positions, including Federal Reserve Chair, Jerome Powell. Inflation for most of us was very easy to see– the stock market was soaring, home prices were soaring, and gas prices were moving higher.

WHY Now?

I’ve been involved in many conversations about inflation over the last 12 months, and the theme that often comes up is “Why Now?” or “What makes this time different?” My answer is, “It’s complicated.” There are many variables that go into inflation as a whole, which is why it can be so challenging to simply “fix” it.

First, inflation is typically a lagging economic indicator. This means that the wheels are often turning toward an outcome well before you can see the signs in economic data. When you have massive spending bills, it takes time for those dollars to get into the economy. Thus, printing on top of additional printing doesn’t immediately impact prices.

With COVID, we had to deal with massive issues on the Supply Side of things. Some countries, like China, went into lockdown mode (they are still doing it) where they essentially stopped factories from producing and shipping goods. As the workshop of the world, this policy wreaked havoc on supply chains.

Here at home, there was an intense debate about returning to work. Extended unemployment benefits forced many businesses to raise wages in order to attract workers. Vaccine mandates were attempted (but failed). Mask mandates were in full effect. The disruptions to normal business operations were far and wide.

Yet— American consumers were armed with cash and nowhere to go. So, we bought stuff. We bought cars, durable goods, and materials for home renovation projects. If we didn’t have the cash, we could simply refinance our mortgages or create a home equity line of credit to assist.

The massive demand being created by stimulus and Fed policy was thrust upon a supply side that was barely treading water. I’m sure you had moments where you witnessed thin (or bare) shelves at the grocery store, right? I mean–who can forget the toilet paper shortages??

When you have low inventory or a shortage of goods, usually the first thing that happens is the price of those goods increases. This is Econ 101. If left unchecked, prices will seek to find an equilibrium level for supply and demand.

Politicians, seeking political points, will often refer to this as price gouging. However, every price increase is not price gouging. In fact, I’d argue that most price increases are attempts at using price to moderate demand.

This was the environment in 2021. It was a contentious year on many fronts, yet we limped through it. As it came to a close, many Americans were able to have a “normal” holiday experience, and it appeared that we were poised to put COVID in the rear view mirror.

Little did we know that Vladimir Putin was plotting to invade Ukraine…

RUSSIA, AGAIN?

I could write paragraphs about my thoughts and feelings around the war in Ukraine. The millions of Ukrainian refugees and the loss of life is a generational tragedy. My sympathies are also with the Russian people, as their leadership has essentially set the stage for an economic death that will be Great Depression-like in magnitude.

It has already been noted that many of the skilled workers in Russian are leaving. Skilled workers are the lifeblood of modern economies. Losing young, talented workers will be an economic and demographic shock that most likely lingers long after the outcome with Ukraine is settled.

It is being said that Russia is the cause of our inflation woes. I mentioned earlier that inflation has multiple variables, and the Russian war is definitely one of them. It’s not the sole or even main cause, though.

Take a look at this chart:

For us, this situation with Russia has more geopolitical implications than energy. The same cannot be said for Europe. The Europeans have been depending more and more on Russian energy, as they have attempted a move to green energy. This left them vulnerable to Russian aggression, as a certain former President told them:

I remain hopeful that NATO’s solidarity and the sanctions on Russia can contain Putin. So far, he seems resolved to have a prolonged conflict, which will have global implications. The biggest impact, in my opinion, will not be energy—it will be food.

Russia and Ukraine are major wheat exporters, and if farmers cannot plant or harvest, we could see global food prices increase (and perhaps some shortages). Sadly, these types of shortages typically impact the poorest nations the hardest. I expect that we will soon find ourselves on humanitarian missions to aid other countries who cannot effectively feed their people.

So, I”m not going to dedicate more time to Russia, as that talking point is more of a political shield than anything else. Our leaders over-stimulated the economy, while simultaneously placing restrictions on our energy industry and strangling efforts to fully reopen our economy to a post-COVID posture.

This is a problem of our own making. We will have to find ways to resolve it. This leads me to where we may be headed.

The Road Ahead

Forecasting is a fun game to play because the prizes can be tremendous if you are correct, and people are usually forgiving if you are wrong. I don’t like that game. I feel that too many folks offer opinions instead of facts without disclosing they are just spouting strong opinions, loosely held.

Even today, there was commentary on CNBC about a certain hedge fund manager that happened to mention he covered his short positions (yet never told anyone he was short the market). So, let’s divorce ourselves from the soap opera that is financial media. They care about eyeballs and ratings, not your financial plan.

At the time of this writing, the newest inflation numbers are fresh out of the oven. And yes, they are still hot. The CPI rang in at an 8.26% increase in year over year comparisons.

While this number was disappointing, it did show a slight decrease from March’s print of 8.54%. The next announcements will be regarding Producer Price Index (PPI), and they come Thursday, May 12th.

The Fed has stayed true to its path of steady rate hikes, with a 50bps rate hike coming the first week of May. You may remember this day, as the market shot upward following the announcement, only to be followed by a sharp reversal the next day.

Interestingly, the bond market has actually been front-running Fed policy. You may have heard the phrase “Don’t Fight the Fed.” Well, right now, it’s the Fed that is behind the curve, as markets have priced in more aggressive action than the Fed is actually taking.

The swift movement in interest rates has roiled bond markets, and for the first time in a long time, many bond investors are learning how risky bonds can be. As rates rise, this also creates a rotation in equities, as more conservative equity investors will replace stocks with bonds they feel have an attractive yield.

Right now bonds are kicking us in the right shin. Stocks are kicking us in the left shin. It seems like we are in an environment where good news is bad news and bad news is expected. Many of the speculative investors and companies with no profits are getting slayed.

Painful, yes. Necessary? Also, yes.

Call me a perma-bull, but when everyone feels this negative, I tend to think we are close to a turn. This doesn’t mean that we are done with volatility, and it’s definitely possible that we could see more downside action. Just like markets can overshoot to the upside, they definitely can overshoot to the downside.

However, I want to share with you some positive data points and some reasons to be hopeful for the future.

People are working. The unemployment rate is at 3.6%, and it’s been reported that there are 2 job openings for every unemployed person.

2. Consumers have savings. YES…the same savings that could exacerbate inflation if spent. However, this is a net positive for household balance sheets. As the “Wealth Effect” dissipates, people may be inclined to hold onto their savings in the short run; which could eventually turn into tailwinds for the economy in the long-run.

3. Many companies have met or beat earnings expectations in Q1 2022. If strong companies can continue to deliver with their earnings and guidance, it’s only a matter of time before the market takes notice.

In The Pocket

One of my favorite sports to watch is NFL Football. My favorite positional players tend to be quarterbacks–I’m a long-time Tom Brady fan, and I’ve taken a real liking to Joe Burrow in Cincinnati.

Quarterbacks in the NFL have to remain poised at all times. Those who can’t, typically make errors that cost their teams. Those who can, usually find a way to win championships.

Imagine the poise required of someone like Tom Brady (who is 44 years old by the way) as he drops back to pass knowing the most physically gifted athletes want to drive him into the turf. Brady averaged 38 pass attempts per game in the 2020 season. How does he do it?

I don’t think he’s superhuman. I think Brady has developed his calm because he’s been there thousands of times before. He stays in the pocket because that’s where he can do what he does best—find the opportunity to help his team.

Times like these are tough. Be encouraged. As investors, we have been here before. I don’t know how this will ultimately play out. I expect some surprises along the way.

Key things to remember when markets get cranky are:

Do you have a personal financial plan?
Do you have a long-term investment horizon?
Are you expecting any major life transitions in the next 2-3 years? Have you planned for them?
What opportunities are you seeking?
Human nature is a failed investor. Fight your urge to react emotionally.

As always, our team is here and ready to listen, plan, and assist you however we can. Please do not hesitate to reach out to us.

Disclaimer: The value of assets or income from investments may be worth less in the future as inflation decreases the value of money.