NO SOFT LANDING IN SIGHT
May 18, 2022
MARKET UPDATE:
NO SOFT LANDING IN SIGHT
STEPHANIE N. CAMPOS, CFP®
CERTIFIED FINANCIAL PLANNER™
For the past two years, we’ve seen what a pandemic can do to many aspects of our lives – both personally and financially. On May 12, 2022 the White House acknowledged that 1 million Americans have died from the Covid-19 pandemic. That’s more than the number of American deaths from World War I, World War II, the Korean War and the Vietnam War combined.1
Stocks on The Descent
The pandemic has continued to send shockwaves through the global economy causing big swings in the US stock market. On May 18, 2022, The Dow Jones Industrial Average, which is a group of 30 well-known US stocks, fell 1,164 points, or 3.6%, marking its worst decline since June 11, 2020.2 The S&P 500 Index fell 4% and the technology centered Nasdaq Composite fell 4.7%.
This is a sharp contrast from the end of 2021 where investors enjoyed a strong gain of 26.9% in the S&P 500 index 4. But as the fine print on any investment tells us, past performance doesn’t guarantee future results. The easy money had already been made off the back of the estimated $5 trillion in US government stimulus provided as a response to the pandemic.
As of early March, the S&P 500 was down -10.25%, which was officially considered a “correction”. Investors were grappling with geopolitical fears around the Ukraine and Russia conflict3 and the rising commodity prices (specifically gas and food) that resulted. The S&P 500 index will officially be considered in a “bear” market if its price falls below 3,837 (which as of May 18, 2022 is less than 100 points away).
Is A Good Economy Bad For Markets?
Entering a bear market might seem surprising since 2022 began on the heels of a slew of positive economic data. According to the Bureau of Labor Statistics, the current unemployment rate is low at 3.6%4 as opposed to the average of 5.76% 5. The value of all the goods and services that the US produced, our Gross Domestic Product (GDP), was up to 6.9% for the 4th quarter of 2021 which is markedly higher than our average of 3.14%.6
Most of us would assume that good economic data means the stock market will continue to do well—but in fact it means the opposite. The unemployment rate and GDP are lagging indicators, meaning by the time these numbers indicate a healthy economy, the stock market has already taken it into account. In fact, if we look at the stock market’s performance when the unemployment rate is below 4.3%, the market only earns 2.8%.7
Recession Fears
The Federal Reserve System, or The Fed for short, is the US central bank which manages the money supply and interest rates to create “maximum employment and stable prices”.8 Prices have been anything but stable with inflation currently at 8.6%, the highest it’s been in 40 years.9 The Fed will continue to raise interest rates in an effort to cool down the economy and bring inflation back down to their 2% target. A “soft landing” would mean that they are successful without throwing the country into a recession, which is defined as two successive quarters of negative economic growth.
When the Fed Chair Jerome Powell was asked by The Wall Street Journal to clarify what a “soft or soft-ish” landing meant, he pointed to the fact that the unemployment rate is so low that it could withstand an increase without resulting in a recession. He drew on the metaphor of landing an airplane. “Sometimes the landing is just perfect, and sometimes it’s just a little bumpy”.10
As evident in the Bureau of Labor Statistics chart below, we see how quickly the unemployment rate rises when a recession occurs. Unfortunately, by the time the unemployment or recession data is available, the actual recession is already underway. Businesses will find it difficult to make sales and that leads to less money available to pay bonuses, commissions and possibly even lay-offs. At the same time, the cost of everyday items will still be high so the average person will find their budget tight, with few opportunities to make more money. Home values may go down and accessing credit will be more expensive due to higher interest rates. For these reasons, I recommend clients keep their emergency fund intact and possibly increase it depending on their personal circumstances.
The 2s and 10s
Economists and investors, like myself, are skeptical that Powell’s plan will work. I find the bond market yield curve inversion to be a compelling signal that a recession is on the horizon. It points to the anomaly when the long-term interest rates (for the next 10 years) fall below short-term interest rates (within the next 2 years). According to BCA Research, this occurred before 7 of the past 8 recessions, with no false signals.11 Most recently this occurred on April 4, 2022 and normally the recession begins about 1 ½ years later12 which brings us to October 2023. Jan Hatzius, chief economist at Goldman Sachs, estimates a 15% probability to a recession in the next 12 months and 35% within the next 24 months.13 Although these probability numbers seem low now, they can change quickly.
Importance of Planning
As investors, we have to focus on what we can control. In my opinion, the best approach is to work with a financial advisor who is a CERTIFIED FINANCIAL PLANNER™ to build your ideal financial plan and investment portfolio. By choosing an asset allocation, which is the mix between stocks, bonds and other parts of the market, you create a balance between the risk you are taking and the growth you expect.
Once you’ve chosen your asset allocation, monitoring your portfolio and periodic rebalancing become important to help you stay on track. Investments such as stocks, real estate investment trusts (REITs) and treasury inflation-protected securities (TIPS) all work to offset the negative effects of inflation. Selling the investments that are up and reallocating into other parts of the market that are not as strong takes discipline and conviction. However, it’s the best way to practice the “buy low, sell high” investing mantra that we all strive towards.
A personal CERTIFIED FINANCIAL PLANNER™ can help you build and optimize your ideal portfolio for long-term investing. Learn more about our services.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Sources:
1 Mary Kekatos (2022) “1 million have died from COVID in the US Experts wonder how this seems normal.” Published on abc NEWS Retrieved from: https://abcnews.go.com/US/us-nearing-million-covid-deaths-experts-normal/story?id=83863055 [Online Resource]
2 Orla McCaffrey/Caitlin Ostroff (2022) “Dow Slides More Than 1,100 Points in Worst Day Since 2020” Published on WSJ.com Retrieved from: https://www.wsj.com/articles/global-stocks-markets-dow-update-05-18-2022-11652859762 [Online Resource]
3 Terence Gabriel/Lance Tupper (2020) – “LIVE MARKETS U.S. stocks ring out 2021 on a quiet note”. Published online at Reuters.com. Retrieved from: ‘https://www.reuters.com/markets/asia/live-markets-us-stocks-ring-out-2021-quiet-note-2021-12-31/’ [Online Resource]
4 US Bureau of Labor Statistics “Economic News Release, Consumer Price Index Summary”. Published online at BLS.gov. Dated Friday, May 6, 2022 Retrieved from: https://www.bls.gov/news.release/pdf/empsit.pdf
5 Trading Economics (2022) – “United States Unemployment Rate”. Published online at Tradingeconomics.org. Retrieved from: https://tradingeconomics.com/united-states/unemploymentrate#:~:text=Unemployment%20Rate%20in%20the%20United,percent%20in%20May%20of%201953′ [Online Resource]
6 The Conference Board (2022) – “The Conference Board Economic Forecast for the US Economy”. Published online at Conference-board.org. Retrieved from: https://www.conference-board.org/research/us-forecast#:~:text=The%20Conference%20Board%20forecasts%20that,year%2Dover%2Dyear [Online Resource]
7 Michael Tse (2021) – “Do Markets Like High Unemployment?”. Published online at Ca.rbcwealthmanagement.com. Retrieved from: https://ca.rbcwealthmanagement.com/irene.so/blog/3105003-Do-Markets-Like-High-Unemployment [Online Resource]
8 Board of Governors of the Federal Reserve System (2021) – “Monetary Policy Principles and Practice”. Published online at Federalreserve.org. Retrieved from: https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm [Online Resource]
9 US Bureau of Labor Statistics (2022) – “Economic News Release, Consumer Price Index Summary”. Published online at BLS.gov. Retrieved from: https://www.bls.gov/news.release/cpi.nr0.htm [Online Resource]
10 Ben Winck (2022) “While aiming for a ‘soft landing’, Fed Chair Powel warns that cooling inflation without plunging into a recession will be ‘challenging’ Published on BusinessInsider.com Retrieved from: https://www.businessinsider.com/economic-outlook-inflation-soft-landing-challenging-jerome-powell-federal-reserve-2022-5 [Online Resource]
11 Alexandra Scaggs (2022) “An Inverted Yield Curve Doesn’t Always Predict a Recession. Why This Time Is Different.” Published online at Barrons.com. Retrieved from: https://www.barrons.com/articles/inverted-yield-curve-recession-wall-street-51649170366?tesla=y [Online Resource]
12 Ryan Detrick, CMT, Chief Market Strategist (2022) “10 Things To Know About Inverted Yield Curves” Published on LPLResearch.com Retrieved from: https://lplresearch.com/2022/04/06/10-things-to-know-about-inverted-yieldcurves/#:~:text=Another%20way%20to%20put%20it,average%20about%2019%20months%20later [Online Resource]
13 Goldman Sachs 2022 Outlooks “Will The US Go Into A Recession?” Published on GoldmanSachs.com Retrieved from: https://www.goldmansachs.com/insights/pages/will-the-us-go-into-recession.html [Online Resource]
