WHAT HAS 2022 TAUGHT US SO FAR?
The first third of 2022 is over. A LOT HAS HAPPENED! Ukraine was invaded by Russia, Dr. Anthony Fauci has declared that the Coronavirus has stopped being a pandemic and has entered endemic existence, Will Smith made himself infamous after being famous and The Bengals won their first Super Bowl (The Bills will always have next year),
So, what did we learn this year so far?
1) The war, surging inflation, and rising rates led global markets lower.
This is as close to a “duh” moment as you can get. Uncertainty and higher prices always create growth issues.
The war in Ukraine is a horrible humanitarian issue and could be economically devastating to many countries, however the USA of is not one of them. You could say you were surprised by Russia (Putin) invading Ukraine but then you would have to have forgotten the other 10 times Russia invaded another country since Putin became their leader.
Inflation hasn’t been this high since Reagan was voted into office! Looking back on history, if that is our starting point the next 40 years should be incredible. Inflation is measured over a 12-month rolling period. By the time we get to August it will “look” like inflation is under control, but that’s only because you comparing the growth from our high inflation last August.
Even though rates could rise many more times this year, and by higher amounts than predicted, the idea behind rising rates is to keep them going up until you slow the economy enough to keep it from overheating.
None of the listed above are going to be what leads us into a recession.
2) The Fed embarked on a more aggressive path to tame inflation
Inflation is not a regular thing for us. Since Reagan left office in 1989, inflation hit a peak in 1990 at 5.4% and then again in 2008 at 3.85%. A 65-year-old today was 33 in 1989. This is new territory for all of us and lessons of the past may be beneficial, but we will only know that after we have gotten through this phase. Low inflation for the past 30+ years does allow me to be positive that inflation will go back down again. A behavioral finance expert will say I am using recency bias. That said, we know that inflation is high because of COVID. If it weren’t for COVID all of the money that flowed from the government directly into our pocketbooks would not have
happened. If it weren’t for COVID the supply chains would not have broken last year. Once that money is spent and our supply chains are back to efficiency stage, inflation will go away.
3) US Economic Growth is slowing, not stalling:
The USA has shown that it is a better ability than any other country to adapt to new issues. Now this could be because we are in a relatively benign space in the world and have an excellent capitalistic society. It also could be because at this point in our history, we have no competitors. China, you say? China is a very large country with a huge population and a desire to make money, not be number 1. They need our markets as much as we want their low-cost manufacturing capabilities. The governments may have issues with each other but the economies are fully invested in each other. Don’t even bring up Russia, their economy is smaller than Italy’s.
What should we expect from our investments? We are now receiving first quarter earnings reports from publicly traded companies around the United States. Earnings season is a time that comes around 4 times a year that lets investors know how all publicly traded companies are doing financially. Experts than make predictions which in the short-term drive markets. This highlights the adage that during short periods of time investing is more art than science and during longer periods investing is more science. A global look at the S&P 500 will show you that the deviation range of returns over any 1 year period is 86% but 20% over any ten year period and only 9% if you look at any 20 year period. (J.P. Morgan Guide to the Markets) The worst ten year return is -1% and the worst 20 year return is a positive 6%.
Investors should prepare for a changing landscape i.e. a lot more volatility. The consumer drives our economy and our investment markets. The consumer is still consuming but spending patterns are shifting – as the pandemic fades, people are going out and no longer shopping for things and goods. Google noted travel search demand is now ahead of pre-pandemic levels. On a weird note we are currently not in a recession and yet consumer confidence is at about the same level it was in November 2008. What happened after November? The US Stock market went on a 12 year tear.
The first third of the year has been a poor investment if you were investing in stocks or bonds. The only positive major sector? Real estate. If you are trying to gain in the bond market because of the rising rates look to floating rates, high yield bonds, emerging market debt and global bonds. Outside of tradeable bonds; value stocks, real estate and private credit could work very well.
Finally, behavioral finance nerds are loving how irrational people continually prove themselves to be. Irrationality causes significant, identifiable efficiency disruptions in investing. Sector funds and ETF’s will not perform as well as the money manager who chooses individual stocks and bonds.
Fundamentals of investing haven’t changed. Invest in good companies and money managers for the long term. If you are in accumulation mode, this is a buying opportunity. Sell your gains and reinvest in areas getting beat up. If you are in distribution mode, you should have 2 years of cash accessible to you. This allows you to be like the accumulator and take advantage of inefficiencies. If you are too busy
or not interested in doing all of the work that is entailed in managing your money hire a money manager.
This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Commonwealth Financial Network® nor Best Times Financial do not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Kevin Best CFP®, MS, AEP®
Best Times Financial Planning
345 Woodcliff Drive, Suite 2A, Fairport, NY 14450
Office: (585) 504-3600