Slow Down or Recession




April was a rough month for investors. The tech-heavy NASDAQ posted a -13.3% for the month, its worst monthly performance since the Financial Crisis (October of 2008). The broader benchmark S&P 500 (-8.8%) fared only slightly better, but you would have to back to the throes of the pandemic (March of 2020) for a tougher month.


There are two realities that we’d like to remember as we go through our analysis:


1) As the best investors always say, volatility is the “price of admission” for investing. Historically, the major market indexes experience a correction (a 10% to 20% drop) ever 18 months.


2) You haven’t lost money on an investment until you sell it.


Times like this are uncomfortable and sometimes painful. We feel it too. Sometimes paper losses pile up quickly. We’ve been through many periods like this before and we’ve learned that patience is eventually rewarded (Any long-term performance analysis bears this out). Looking at the big picture, investors should buy good stocks/funds/ETFs, don’t do anything drastic, and let economic growth do its thing.


The truth is real economic growth in the 1st Quarter was better than the headline number. Lower inventories, a drop in government spending, and a 17% increase in imports all were extraordinary factors for the quarter. Importantly, individuals and companies continued to spend in the 1st Quarter. While the froth is being taken out of the economy, we expect modest growth in the 2nd Quarter and the second half of this year. Absent a Fed policy mistake, we do not forecast a recession at this time.


With the significant increase in inflation, the Fed has talked about being very aggressive in their interest rate hikes. Fed governor Christopher Waller sees higher interest rates as a “brute force tool” to slow inflation, and as a result he said there will be “collateral damage.” The markets have priced in a fed funds rate of 2.75% by year-end, but St Louis Fed President James Bullard called for 50 basis points more, meaning 3.25% by year-end. Tough talk indeed.


But there are indications inflation may by peaking. Core CPI, ex-food and energy was (only) +.3% month-over-month in March, the lowest increase since September. Key factors were a 3.8% decline in used car prices and a reduction in many electronic products. Another factor buried in the GDP report is the continued decline of disposable incomes. With the removal of government income support (i.e., Covid benefits) there is a developing reduction in demand (therefore inevitably depressing inflation).


While we recognize the news has been mostly bleak lately, not all is bad. Corporate and household balance sheets are strong, and governments are running surpluses.