Investing these past couple of years with the Fed at the helm of monetary policy has been like riding with a driver that slams on the gas and brakes between traffic lights. Not much fun for the passengers.
Yesterday the Federal Reserve got more serious about tackling the inflation problem it helped create by raising the Federal Funds rate 75 basis points (0.75%). This is a good thing as rising interest rates will eventually reduce the demand for goods and services which in turn should ease rising prices. When you look at the historic relationship between inflation and interest rates, it is clear the Fed still has a lot of work to do to offset all the stimulus they pumped into our economy over the past two years. Presently, I am more concerned about the outlook for bonds than stocks and am making adjustments in portfolios accordingly.
Lest there be any doubt, stocks are in a bear market which by definition is down 20% or more from their peak. Bear markets that have occurred during recessions are historically worse than those that are not accompanied by a recession. Recessions are loosely defined as two consecutive quarters of negative gross domestic product growth (GDP). In our country, the National Bureau of Economic Research determines which economic slowdowns constitute a recession. At this time our economy is nowhere near a recession based on their measures of economic growth. According to data compiled by Raymond James, non-recessionary bear markets drop 24% on average, which ironically is how much the S&P 500 is down after today’s drop in shares. It has been down more than this on an intraday trading basis. With the 10 year versus 3 month Treasury yield curve being positive and thus also implying no recession in sight, it is logical to believe the bulk of the damage is already done for stocks. It is encouraging too that on average it has only taken 10 months for stocks to return to their former highs from their non-recessionary bear market lows.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President