As we have also ranted over the many years…the market is/has priced in the economic consequences of the Fed actions, that’s why the market is lower… As we have ranted recently, significant market pullbacks are excellent entry points for new investors and good times for rebalance or equity addition for longer term investors. This time is no different. Buying low hasn’t lost its luster and patience is normally rewarded. At the point of pain where one thinks they must be crazy to add to stocks is the perfect time to consider such action. Why…. Because the equity markets will start moving north WHILE the economic data says we are in the heart of the recession. Markets (being forward looking) are pricing ahead what it sees 12 months in the future. By the time the data gives the “all clear” sign, the markets are significantly higher. “Feeling good” in the moment is a lousy market investment timing device.
What happens in a recession? Typically, as money supply decreases and cost of money increases, what we call “next derivative” issues will show up. Asset pricing of less liquid assets (think real estate) will decrease. Prices of homes and other large ticket items decline as the demand side of the supply/demand equation slows. Discretionary spending (think purses, golf clubs, jet skis, fine dining) slow significantly. Economic slowdown inevitably leads to businesses reducing costs and headcount (layoffs). About this time, headline news (again… back to the media and their garbage) undermines consumer confidence and people slow their spending. As it continues some businesses survive (and even thrive) while others fail. Creative destruction occurs and the weak give way to the strong. In the late stages, business closure, layoff, and asset price decline, cast a pall over the collective psychology. The news is normally worse than the reality but that’s another rant for another day.
On the bright side, for those well-capitalized individuals who are financially conservative, not over-leveraged, and balanced….it’s not that bad. One might say it’s actually advantageous. Prices for goods and services are better. Costs for trips, luxury goods, and larger expenses are typically lower. Finding people to do home remodel jobs is possible and buying a car “off the lot” will become normal again. Crypto traders, home flippers, and other “nuevo smart” are relegated to oblivion and hardworking folks that add value to society thrive. Recession and economic contraction are the reset the system needed.
How does the recessionary cycle end…. Glad you asked 😊…..As the cycle plays out, and aggregate demand declines, interest rates normally drop allowing for refinance or optimal debt usage. Business and people gain more efficiency and are cost effective in cutting expenses and producing more with less. One real life example I see a lot is client termination or modification of service with their phone, cell phone, cable, and app based streaming platforms. A microcosm for sure, but real time example of the cycle at work. As the headlines get worse, and demand declines too far….to stimulate the economy the Fed steps in and starts to loosen monetary policy. Rate cuts and easing ensue. Cheap money is the seed of growth, and a new economic cycle is born….With a new cycle come asset gains, stock market new highs, and a new business boom. Maybe this time is different, and it doesn’t play out this way, but I don’t think so. As boom leads to bust leads to next cycle the past portends the future.
As always, don’t hesitate to reach out if you would like to discuss this or any other subject. We are here for you and take that commitment seriously every day. Have a great rest of the summer!
Ed, Frank, & Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
cell 610-745-1931
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