Ehhhh, what’s up, doc?
July 14, 2022
At the End of Q2 2022 –
The second quarter could be inserted in Macbeth, Act IV, scene 1 with the witches singing “Double, double toil and trouble,
Fire burn and caldron bubble….” It has certainly seemed like a witch’s brew to have so much havoc converging on all parts of the market.
Often when things go awry, we are told to be patient since similar events have happened in the past. Our brains tell us “This time is different” until the issue passes us by looking much like the past.
However, this time really is different. In all of U.S. stock market history bonds have been an effective safety haven to reduce portfolio volatility…until this year.
Historically, when stocks fall, Treasuries have provided some portfolio protection…until this year when bonds have fallen more than any standard portfolio model ever anticipated. Bonds actually added to the S&P-500 losses.
That has rarely ever happened before … but this year is another rare exception.
Historically in times of market turmoil, whether inflation or crisis caused, gold is expected to be a haven…until this year. Gold isn’t acting according to script. It’s down roughly 5% this year. And it’s down around 15% from its early March peak.
In normal bear markets for stocks, interest rates and inflation are falling which is good for bond prices…until this year. After flooding the economy with digitally printed money, the Fed watched inflation accelerate. We were told that inflation was “transitory” … “Not to worry.”
Both Treasury Secretary Yellen and Fed Chairman Powell have apologized to Congress for making a mistake. However, we are the ones paying the price.
Inflation may have peaked, that doesn’t mean relief is as fast as an Alka Seltzer – “Plop, plop. O’ what a relief it is.”
The delay in addressing inflation is, in part, causing wages to rise as employers try to retain staff. Wage cuts don’t happen until a deep recession causes business closures.
The delay in addressing inflation is causing home prices, and more importantly, equivalent rental values to rise. Like wages, rents don’t drop until vacancies are everywhere you look. That isn’t happening anywhere except in the middle of deep blue cities.
We explained much of this in our July 9 Stock Market Update webinar which you can access at www.IRIRadio.com/video.
In prior bear markets, business was slowing, and inflation was dropping. The
Fed was able to lower interest rates so businesses and consumers would be confident to spend, thereby stimulating the economy…until this year.
Inflation is forcing rates higher whether by investors or by the Fed. On our radio program (11 AM Saturdays on 770-KTTH) we have warned that the Fed was painting itself into a corner.
Another way to look at the situation is that Chair Powell is a trolley car switchman.
There are two choices, inflation, or recession.
Raising rates makes the Dollar stronger hurting profits of our large multi-national companies. Lower profits are bad for stocks.
Well then, let’s have a recession. That’s bad for stocks, businesses shrink or close and unemployment rises. Except, this time is different.
The Atlanta Fed GDPNow data indicates we are already in a recession. Except, prices aren’t dropping. Shortages are still problematic. Employers are hiring, not firing.
This time is different.
The stock market rallies for a week to ten days then unwinds the advance. Even perennial optimists like JP Morgan’s Jamie Dimon have changed their tune lately. Last week he warned of a coming economic hurricane. Again, this time is different.
All our portfolios are dominated by or 100% cash at the present time.
Question? Call us. 800-317-9119.
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