We started the year with a January upturn as optimism peeked out the window and hoped for the best. This was followed by February when reality hit. The reality that the inflation beast was not easily beaten, and more time (and rate rises) were needed. March is coming in like a lion, and not in a good way. The early ancillary economic damage is starting to happen from the weakness. Prices are moderating, just not fast enough. And the job market is still strong….for now.
The key piece of the puzzle is the strength in the overall employment. It’s the lone data point that has not (yet) rolled over and started to weaken. But I would contend this is misleading. Like most things, there is not “one” job market. It’s made up of all the various and sundry jobs out there. As mom would say…. “doctors, lawyers, Indian chiefs”…lots of different people doing different things. At this point, technology, real estate/property management, automotive and manufacturing….. all very weak with rampant job losses. These are being overshadowed by strength in the services, medical, and hospitality sectors. As one sector gets hit, others are still strong. Like the boxer that wouldn’t go down, many employers try like hell to hold onto their workers. At some point, it won’t be possible. Cost of money (interest rates) will squeeze everything and slow down all things.
As we have discussed before, in Bear markets during economic slowdown (which is where we are now) things happen slowly. Let’s look at a sequential check list. The crazy speculative stuff gets hit first….check. Think crypto, SPACs, NFTs, stocks with no earnings. The next step is the revaluation of growthy mainstream stocks that got ahead of themselves…. Check. Think Amazon, Meta, Google, Tesla, and such. Last comes the selective revaluation of the rest of the market….check. From the market peak on 12/31/21 the Dow is down around 13 percent (not including dividends). Totally a function of forward earning projections.
From an economic perspective, there is a lag. Stocks lead, the economy follows. The markets started south 14 months ago and accelerated through the year. For a while, the economy showed nothing. That began to change in Q4 of last year. Real estate prices, auto prices, costs of furniture and electronics started to decline. As interest rates continue to rise the impact will be greater and permeate further. As discussed prior, economic cycles are the visualization of the “creative destruction” theory. Simply put, inefficient or ineffective enterprises are destroyed and replaced by economically efficient ones. That’s what happens when things get tight, and recession happens. The failure to SVB was a result of an old time “run on the bank”. Haven’t had one of these since WAMU in 2008. The fact that SVB was a financial vessel for grossly inefficient capital consuming startup businesses made it a prime candidate for failure. As the Fed raises rates, and SVB’s clients are starving for cash, a slew of mass withdrawals wasn’t a surprise. In this man’s opinion, it was a failure of their risk management and not an indictment of the general economy. But, like all down cycles, some will make it, and some will not.
One question that comes up repeatedly is “with the cost of everything these days, how do people keep spending at this level”. Like most things there isn’t a single short answer but a large part of it is debt. Especially debt use by the under 35 crowd. At this point, the use of consumer credit (credit cards) is at an all-time high and balances are up 30 percent from the Covid lows and 12 percent from the march 2020 highs. Basically, people refuse to stop and are just adding to their credit card balances. That’s the first part. The second part is the over 55 crowd are still spending from their Covid savings. Remember, during Covid people couldn’t spend because there was nowhere to go. Now they are going out and staying out. Funny how being locked up in place for 2 years will do that!
In closing, and the reminder…. none of this should influence your macro level financial plan or investment allocation. If those are well thought out, and your investments sound, you are where you need to be. We can always adjust your allocation or risk tolerance if need be. Understanding the environment allows you to put the relative returns of your own investments into perspective. Years like 2022 are going to happen. Laws of gravity have not been repealed. No, it’s not fun but it’s all part of the long-term economic process. In the movie called life, the actors change but the show never does. The cycle will end, things typically turn up, and a new long term recovery will emerge.
As always, stay well and don’t let the news get you down. If you have any concerns or would like to discuss your own situation, don’t hesitate to reach out. We can do a call, office meeting, or Zoom at any time. We work for you so don’t feel odd about contacting us at ANY time.
Ed, Frank, and Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
cell 610-745-1931
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This material is intended for informational/educational purposes only and is theoretical. The data and theories discussed are notional to make a point. The details and conclusions are solely the opinion of the author. It should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investing entails risk of loss and no guarantees are implied or suggested. Please contact your financial professional for more information specific to your situation.