Is there More Pain Ahead?!

As we roll into the middle of September, after 8 months of (mostly) pain, we’ve been told to expect some more.

Arguments continue whether the US economy will fall into a full-blown recession or a less severe slowdown…. a “growth recession.” Can the Fed engineer the “soft landing” we hear about so often? Lots of uncertainties remain.

But unless you are investing for the very short term or have an extremely low tolerance for risk, it makes sense to stay invested and maintain your equity holding at this time. History has shown us that stock market declines, like we’ve seen in the first 8 1/2 months of this year, have turned out to be long-term buying opportunities.

Are we winning or losing? Again, there are a variety of views; Steve Hanke of Johns Hopkins thinks we’re in for a “whopper” of a recession in 2023. In an interview on CNBC last week, he pointed to a huge growth in the money supply, a result of Covid, as the culprit.

Many other economists are forecasting a recession as the lag effect of Fed tightening works its way into the system. So far in 2022 the Fed has raised its benchmark rate four times for a total of 225 basis points. Another 75 basis points are expected later this month.

It will also be important to keep an eye on the November elections. If the House of Representatives and /or the Senate significantly change, government spending could be affected, this could change the inflation situation.

In a piece last week by MSN, Fundstrat’s Tom Lee was quoted as saying inflation is starting to “drop like a rock” rather than a feather. In fact, according to Lee, some regions of the US economy are seeing outright deflation. Lee highlighted the fact that commodity prices like gas, lumber and wheat are falling quickly, as well as chicken, beef, clothing, air fares and used cars. He expects rents and housing costs to fall rapidly as well. Of course, if a clear downtrend in inflation occurs, it would change the trajectory of Fed policy.

As you can see, forecasts are all over the board during this time of high uncertainty. However, we are focusing more on the longer-term view currently. Historically, declines like we’ve seen so far this year have ended up being long-term buying opportunities. This inflation beast will take a while to wrestle to the ground. Yes, we still see some pain ahead. Undoubtedly, there will be more volatility and possibly a couple tests of the June 16 lows. But, unless you have an extremely short-term investment time horizon or a low tolerance for risk, our advice is to stay the course.