Friday, May 20th, 2022
Market Update: During the day today, the S&P 500 hit an intra-day bear market, which means the S&P 500 was down 20% from the recent highs. Since 1929, the market has experienced 23 bear markets and since I started working at American investment Advisors in 1996, we have experienced seven 20% declines. Bear markets are not uncommon. What makes this one different than some of the more recent bear markets is that inflation is having a disastrous impact on goods and services. You have probably noticed the price increases at the grocery store, when you purchase airline tickets and when you treat yourself to a chicken sandwich at Panera or a turkey sub at Jimmy John’s. Target came out earlier in the week and said that their profit margins have been squeezed by increasing product costs as well as increasing fuel costs used to transfer products to their Target stores. They also added that they purchased too many televisions thinking that the Covid televisions sales would continue for the foreseeable future. Instead, consumers seem content in shifting those discretionary dollars to travel.
Some view this time as a 1970’s redo. I have heard more people repeat the word stagflation over this past week than I care to count. Stagflation is when the economy sputters or slows, unemployment increases, and you have inflation of goods and services to boot. Many analysts also believe that a “hard landing” is a foregone conclusion, and we will end up in a recession. They might be right.
From what I have heard from PIMCO and Vanguard’s fixed income department, the bond market has substantially priced in rising rates in the intermediate and longer-term bonds. The Fed will most likely follow through with raising the Federal Funds rate 0.50% between the next two meetings bringing the short end of the yield curve up to 1.75% by the middle of the summer. We know now that the Fed should have increased rates sooner than they did. Between the bond market doing its thing and the Fed doing their increase, perhaps that will be enough to slow the economy down without tipping it into a recession. Remember, there is a lag of about six months before the full impact of any Federal Reserve increases are felt in the economy. The 30-year mortgage, which is substantially influenced by the 10-year treasury, already has rates at 5.5%. Perhaps that will slow down housing a little bit. The war in Ukraine is certainly not helping inflation and China keeping things closed due to Covid is not helping the situation either. As we all know, the markets dislike uncertainty and there are certainly a lot of variables out there that will keep the investors guessing in the months ahead.
Recommendations: My recommendation is to stay the course. As I mentioned above, we have seen this before. While inflation is something new, I could point out something that did not happen before in each one of those different bear markets mentioned above. There is always something that is new. I know these times can be unsettling – especially for those who may have just put a large chunk of savings to work. Hang in there. For those who are averaging-in to the market – think of the S&P 500 as something on sale for 20% off. Now is the time to think about increasing your semi-monthly deposits to your 401(k). Sure, it could become worse from here, but you want to be buying when the markets are down – not necessarily when the markets are at their all-time highs. The good news? A couple of the analysts I follow came out and said that they think the S&P 500 could rise to 4850 by the end of the year – that is a 24% increase from Friday’s closing price. As we know, anything can happen. As John Bogle, the founder of Vanguard funds, used to say, “Stay the course!”
AIAI News: My right-hand man, Ryan Mulcahy, has been offered a portfolio management specialist position in the Equity Asset Management division at Robert W. Baird in Milwaukee. Ryan is moving to Milwaukee where his girlfriend is finishing her occupational therapy education over the next two years. He has been with our firm since August of last year when Nicole left to travel the country. Ryan graduated from Edgewood College in Finance last Friday. It was a pleasure to work with Ryan and I wish him the very best with all his future endeavors
While I will miss Ryan, I am excited to announce that C.J. Leuzinger has joined American Investment Advisors and has been training under Ryan over the past couple of weeks. He was a classmate of Ryan’s at Edgewood College and graduated with a degree in Finance and Management. Next time you are in the area, be sure to swing by and say ‘hi.’ I am sure he would be happy to meet you.
Warm regards,
William A. Bullock
Enclosures