Inflation - Recession?
After a standout 2021, Financial Markets have had a rough start to the year and according to some, things could get even worse before they get better.
Rising interest rates, geopolitical tensions and persistent inflation combined with a number of other bearish factors beg the question how much further will stocks drop?
During the last 19 bear markets, the average decline has been 37% from top to bottom with an average duration of 289 days. If history were to repeat, then today’s bear market ends in October 2022 with the S&P at 3000. That would mean the possibility of another 25% downturn from current levels.
While history and averages are interesting and useful, I prefer different tools and indicators to calculate future possibilities and market behavior.
Some think that with interest rates rising and inflation not really budging, a recession seems logical. The Covid recession of early 2020 was the shortest in the US on record. The question now is how long the post-Covid economic rebound can last and whether we might be heading for another recession.
The Fed recently raised interest rates for the first time since 2018—to a range of 0.25% to 0.50%—and suggested that the federal funds rate could climb to 2.5% or higher by the end of 2022 and lowered their economic growth projections for the year.
But that’s not all bad news. The U.S. labor market remains very healthy and is one of the reasons why the Fed feels comfortable raising rates in the first place. Economic growth is going to decelerate, but that’s how you fight inflation. Yes, the problems were intensified by the Fed ignoring inflation for too long and by the ongoing supply issues. But inflation is expected to ease over the rest of this year and likely end 2022 at about 6% and then in 2023 the rate should fall to 3.0%. (We all know that these numbers are only accurate for people who don’t drive and don’t eat, but we can still accept them for trending) As long as that will happen and the Fed doesn’t raise too fast and too much, a recession can be avoided. But even if we will see a recession by the end of 2023 or 2024, it’s not the end of the world. There have been countless recessions within the US economy and markets have worked themselves through every time. People often fear a recession and the media has a heyday with it, but during these periods we are also clearing out poorly performing companies, rebalance valuations and create rock-bottom sale prices for assets all of which then will spur growth again. If you are a trader or short-term investor, the current volatility is providing some great opportunities. I have bought several stocks and options within my personal portfolio last week when Markets took a big tumble. If you are a mid- or long-term investor, you should be in a balanced, diversified portfolio which should be re-balanced right about now and let you ignore the current volatility.
