Not a comprehensive look here by any means. But after today the S&P is off over 20% in just 6 months. Price’s “Blue Chip” (actually a pretty decent fund loaded with tech) is singing the blues - off about 35% YTD. I don’t think the Fed is looking to wreck the markets and thereby, through the “wealth effect”, throw the country into a severe recession - or worse.
Let’s see if the tough talk from Powell & Co. continues much longer.
And, Oh - If you haven’t noticed, commodities have tanked hard in recent days - not a sign of a booming economy.
Comments
China is supposed to be a bright investing spot at the moment. I cannot see myself investing in China-land any more than I'd give my money to Rosneft. The Iron Curtain is up again. The world is in the midst of an economic re-shuffling that is rather unusual. De-globalization. You mention commodities. Still $5.59/gallon here. THAT'S not going to be remedied very soon. Production needs to ramp-up. PRNEX is in the doldrums, as is my ET. Bargain buying time. Bloomberg TV says 1st half of 2022 was WORST for Stock and bonds IN HISTORY. In HISTORY.
No doubt this year is very tough to stay afloat. When both equity and bonds are down simultaneously as most bonds did not offer protection against stocks. A topical 60/40 portfolio is down near 15+% YTD. And we are only half way through the year. Don’t think we are near the bottom.
Looks like sentiment may be shifting for real to serious recession risk rather than risk of continuing massive inflation.
It would be nice to have 2% inflation, 2.5% 30-year fixed mortgages for anyone who wants one, cheap gas, lower taxes, higher employment and a world at peace. But there are tradeoffs to all of those. Markets are in disarray right now ISTM - uncertain of the next turn. So it’s hard to draw conclusions from the past 6 months. There are lag times involved in policy decisions. Tightening tends to begin in advance of recessions. And stock market recovery often precedes the end of one. I don’t disagree with those who see a recession looming. The bigger question is how long and how deep. Further, which investments are likely to prosper during the next chapter as the recession eases and growth resumes?
Personally, I'm in the camp that a recession, if not inevitable, is the bet to play. I'm not going to change my portfolio equity percentage much, but I have been selling some and moving that equity money into financials VFH and health care, PPH. Both sectors hold up traditionally better in a recession. I've also increased my hedge fund, JHQAX.
I'd be interested in other's thoughts for working the edges. It's too late for reducing my 45-50% equity portfolio allotment IMHO. I've ridden this down 12% YTD. But I would like to position equities traditionally per recession expectations, because if we aren't there already I believe we will be soon.
I started buying before , a small amount, to add to some position before Mr Market turned nasty. Then as the market started it's drop I made a few purchases to keep my equity at 35% . After I applied tourniquet & bandages to stop the bleeding I started buying CD's to start a ladder.
So I guess over the 4/th I should see what my equity % is & see where my falling knifes
are hanging out.
Have a Great Fourth , Derf
My thoughts on the topic:
-The Fed would prefer to just jawbone the capital markets to do the heavy lifting of slowing demand. (i.e. talk tough, but carry a wet noodle).
-That might have worked if Jay "Helicopter Cash" Powell had begun tightening in mid-2021, instead of mid-2022. But Jay was all about being re-appointed to a 2nd term. By waiting a year ("transitory" talk), inflation expectations are now strongly embedded in the behavior of economic actors.
-The only way to "kill" inflation is to kill demand. The asset bubbles need to be "pricked" to do so. Obviously some of that has happened. The Fed has a lousy history of avoiding recessions. To be fair, its a tough, nearly impossible job to "thread the needle" -- dampening demand "just enough", without pushing the economy into recession. Frankly, I wish Ben Bernanke were still running the show.
If not for the scheduled Q/T, I would think the bond market would be through correcting. It still may be: if stocks continue to grind lower --- due to downward earnings revisions -- a good chunk of the capital may move into bonds -- thus offsetting the Fed's Q/T sales.
_if the Fed is serious about killing demand -- and doesn't waiver, then a recession is my "base case". OTOH, if the Fed chickens out and "pivots", then a recession may be avoided --- but the cost will be higher, longer inflation, and a loss of confidence in the USD.
[[An aside: there may be bigger issues than "just" the economy this time, geopolitical issues. How can the West "de-fang" Putin? - crashing oil prices. How might that happen? -- a global recession. And which currency benefits from a de-risk trade? The USD. The USD has been very strong (against fiats, but not commodities). But a higher USD (prompted by higher rates) would tend to exert further downward pressure on oil prices. This would put incrementally more "hurt" on Russian oil revenues.
-So, I think bonds will find their final bottom b4 stocks. (Though stocks can have a countertrend rally any time, and July is usually an up month.)
- I always remind myself to "be mindful of the calendar". Even if we get a relief rally, the damage YTD has been extensive. -- Traders will want to register tax losses b4 year-end. (For many institutions, the tax year ends 10/31). So price-action in the weeks before Halloween may provide an opportunity to put money to work as institutional sellers close out their loss-positions.
-Mid-term election results may also provide a boost to the market in November -- assuming the SCOTUS Roe-reversal doesn't jinx a Red Wave result.
-Housing prices have not fallen yet. But that is one big asset bubble which needs to be popped to dampen inflation. If mortgage rates continue to climb, I would expect some of the corporate buyers (e.g. Blackstone, etc) to unload some of their holdings, in favor of bonds. That might precipitate downward price action, as inventory (finally) expands.
Given how 2022 is unfolding, 2023 may be lining up to be a good year. (3rd years of the Presidential cycle usually are)
Just my 8 cents.
Inflation remains elevated while unemployment is very low.
I believe the Fed will continue hiking rates in a deliberate attempt to tame inflation.
This will, almost inevitably, lead to a recession.
It's often difficult to predict the start of a recession, more so in the current complex environment.
Of greater significance, what will be the severity and duration of the next recession?
Line from an anonymous reader posted on Bill Fleckenstein’s blog recently:
“The dead are the best traders: no emotions, no new ideas, no needs, no time flow. The key is to stop waiting because waiting is still an action and exposes one's system to the stress agents.”
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I rather like that. I waited too long to do some things in '22 and so lost some of my profit. But at this point, we're talking LOSSES--- on paper (or a screen) only, though. Don't WAIT. Waiting is different than just letting the time go by. Waiting is a passive activity, but it is an ACTIVITY. I know! I wait FOREVER for that #4 bus, whenever I need it. So, WAITING is intentional. But it can make you your own worst enemy.
On the other hand, I sure don't want to be in and out and switching my portfolio around very often. THAT is counter-productive, too--- as we are all aware.
“Central banks will not have the stomach to keep policy tight enough for long enough to squeeze inflation out,” says economist Martin Barnes.
(Lead-in to this week’s’s Up & Down Wall Street - by Randall Forsyth, Barron’s)
The fact that Barnes said it and Forsyth repeats it doesn’t necessarily make it true. We’ll have to wait and see. In addition, if you subscribe to this theory you must also believe that additional damage will be done to the economy and financial markets by the Fed’s newfound monetary restraint before the central banks decide “enough is enough” and lighten up on the hammer. This might have implications for investors.