The wrestling match with the bear market is entering round 2. Round 1 was exhausting. The bear used all kinds of holds and moves in the first round. The global political unrest hold; the old Chinese COVID lockdown move; the recession rumor reversal and even the Fed interest rate hike near pin.
Inflation remains stubbornly high. Up until now, consumers were weathering higher prices alright, but lately are having to dip into savings to keep afloat. The savings rate in the U.S. has been dropping for weeks. If the cost of gasoline, home energy bills and food continue to increase, the consumer will not have much left for discretionary. So as demand for those types of expenditures declines, production will slow, layoffs will occur, and the economy will slow down. Yes, wages have also been moving up, but not at the rates of prices. Whether the economy slows into an actual recession remains to be seen, but the ferociousness of this bear market seems to point in that direction.
The Fed hiked interest rates ½% in May. Prices kept going up. No surprise because it takes almost 6 months before a move in interest rates, either up or down is felt in the economy. Now the financial markets are looking at the Fed raising rates an additional ½% or maybe ever ¾% in June. That hike likely won’t be felt until sometime in December. Will it be too much and throw the economy into a recession in 2023 or not enough and inflation will keep moving up? The bear market loves uncertainty because it makes people nervous and more likely to be sellers than buyers in the financial markets.
China was loosening some of its COVID lockdowns, but just within the past day or so has reversed direction on that and is tightening back up restrictions. Since China produces so much of the products sold around the world, when they are out of production, inventories decline and prices go up. It not only affects end products, but also the parts to complete products not manufactured in China. The scarcity of many of our goods will continue and that leads to higher prices and longer wait times.
If our scouting report (history) on the bear holds, in the next round he will attempt the wealth effect take down. It’s more psychological than physical. As interest rates continue to go up, and the economy begins to slow, demand for housing will cool and prices of homes will drop. The two biggest assets in most people’s finances are their home and their 401(k). * The average 401k balance is down a little over 7% so far this year.
As your house begins losing value and every time you look at your 401k, it is lower than the previous time, you begin to feel less wealthy and start to rein in spending. Not good for maintaining a growing economy. Our strategy heading in to Round 2 is no different than Round 1. We will take the long match approach and wear the bear down by adding good investments at appropriate times; reinvesting our dividends and harvesting losses for tax purposes when needed.
_
* (Source: 401k Specialist Mag)
_
These are the opinions of Legacy Wealth Management, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
Copyright ©2022 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
