As we entered July, it looked like we were headed for a major market crash and a recession.  The markets improved in July, but the economy sputtered, posting negative GDP numbers for the first two quarters.  July brought us one of the best stock market performances since 2020 (YCharts, 2022).

Market gurus will remind us that the market is not the economy, and the economy is not the market. Not that that helps much. So, what’s going on? The Federal Reserve raised interest rates by a whopping ¾ of a percentage point, and the early numbers show the economy shrank and inflation, as measured by the US consumer process, rose 9.1% in June.  [BTW, the official scorekeeper of US Recessions, the National Bureau of Economic Research, uses many more measures of a recession than two consecutive quarters of negative GDP Growth (JP Morgan strategist interview, posted July 28, 2022).]

Regular readers know that I rarely report a slew of market and economy numbers in this newsletter and then attempt to interpret what they mean. I figure you get enough from your newsfeeds out there. However, I’d like to mention some things about the above.  We’ve been talking ourselves into a recession all year and talk of recession can be a self-fulfilling prophecy.  Read the consumer sentiment out there, and it is dark. The uncertainty and volatility of the above are driven by the need to burn off excess stimulus from the pandemic. We are in uncharted waters, never having gone through a pandemic of this kind, at least not in the last 100 years. Our economy was growing at a little over 2% before the pandemic, and I expect it to return to that rate sometime soon. There will be volatility in the market brought on by this uncertainty, not to mention what geopolitical shocks may be on the horizon.

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So where do we go from here?  Here are a few thoughts:

• Do you need cash in the next 12 to 18 months?  If so, raise that cash now.  The markets are likely to be volatile for the next 12 to 18 months or longer.

• Favor high quality stocks that have low multiples to earning and, if possible, pay a dividend.  For example, JP Morgan trades at 1.3 times book and 9 times earnings and pays a 3.5% dividend.   Berkshire Hathaway trades at 1.3 times book value (not the lowest it has been at – but below average.) (YCharts, 2022).   Compare those numbers to TSLA (109 times earnings, 26 times book value) and companies that analysts and media have high hopes for but haven’t yet made any money.  [These are not recommendations.  They are merely illustrations.]
• Don’t try to be a hero in the bond market.  Interest rates are rising and there will be opportunities but, for now, it makes sense to stay with high quality bonds coming due in the next two years or less.  Why?  Because as interest rates rise, longer dated bonds prices fall.  The iShares Core US Aggregate Bond ETF (AGG) was down as much as 12.5% in the middle of June.  It is still down nearly 8%. (YCharts, 2022)

I don’t know where things are going over the next 12 to 18 months but I have a pretty good idea the overall direction.  Inflation will settle down, the Fed will raise rates until early 2023 (but they may have to retreat sooner), and growth in the economy will eventually return to 2-3% per year.  The market in the meantime may be volatile but with a realistic plan, we can get through it.

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Have a great August and be good to each other.

Have a great month 🏳‍🌈

David