May 2022 - NorthStar Capital Advisors

That 70s economy

Markets gifted us with another burst of volatility and headlines are looking apocalyptic again.

Some folks might think it’s time to bail on markets for the summer, but I’ll tell you why that thinking is a mistake.

First, let’s peel back some layers to explore what’s driving markets.

The latest selloff was largely driven by concerns about how the pace of Federal Reserve interest rate hikes could affect economic growth.¹

The Fed’s “hawkish” policy of rapidly raising interest rates to bring down inflation seems likely to take a chunk out of economic growth.

Is a recession or bear market on the way?

Those are risks we are prepared for.

While the Fed could manage to execute a “soft landing” and successfully lower inflation without triggering a downturn, its track record isn’t so good.

According to Schwab, 10 out of the last 13 rate-hike cycles resulted in a recession.²

Those aren’t odds I’d want to take to Vegas.

However, we are holding a couple of strong cards: a red-hot jobs market and steady consumer spending.^3,4

Could those bright spots fend off a recession or downturn?

Very possibly. We’ll have to wait and see.

Are the 70s back?

No, I’m not talking about bell bottoms and platform shoes.

I’m talking about “stagflation.”

What does that even mean?

Stagflation is a buzzword combining “stagnation” and “inflation” and signifies an economy plagued by low economic growth, high inflation, and high unemployment.⁵

We saw it in this country in the 1970s during an oil crisis.

It’s hard to say if it’s going to happen again. It’s definitely a risk we (and the world’s economists) are watching.

However, there are two points that count against a vintage 70s stagflation scenario: 1) that strong jobs market and 2) inflation that might already be peaking.⁶

So, let’s not panic.

Here’s the bottom line (and you’ve probably heard me say it a hundred times): Market downturns, recessions, and volatility happen regularly.

We expect them.

We plan for them.

We remember that they don’t last forever.

We stay nimble and look for opportunities.

Though it looks like we’re in for a rocky summer, that doesn’t mean it’s time to hit the eject button.

Instead, we make careful shifts, especially in a rising interest rate environment.

The weeks ahead are very likely to be volatile. I’m here, I’m watching, and I’ll be in touch as needed.

Reassuringly,

Dr. Chris Mullis, CFP®, CDFA®

P.S. Need a jolt of good energy? Check out the Monterey Bay Aquarium’s Sea Otter Cam. If you’re lucky, you might catch a live feeding.

1 – https://www.cnbc.com/2022/05/05/stock-market-futures-open-to-close-news.html

2 – https://www.schwab.com/resource-center/insights/content/when-levee-breaks-panic-is-not-strategy

3 – https://www.cnbc.com/2022/05/01/inflation-forces-consumers-to-rethink-spending-habits.html

4 – https://www.npr.org/2022/05/06/1096863449/the-us-jobs-market-continues-its-strong-comeback-from-the-pandemic

5 – https://corporatefinanceinstitute.com/resources/knowledge/economics/stagflation/

6 – https://www.cnn.com/2022/05/01/investing/stocks-week-ahead/index.html

Another wild ride

Markets bucked and sold off again.¹

Should we be worried?

Not necessarily. These things happen pretty regularly, especially when headlines are negative.

In fact, you might recall that we kicked off 2022 with a big drop.²

So, let’s talk about what’s behind the latest wild market ride.

(Scroll to the end if you want to skip right to the reassurance.)

What led to the selloff?

Primarily, economic worries.¹

Worries about new COVID-19 surges.

Worries about Ukraine.

Worries about the U.S. economy.

A report just came out showing the economy shrank by 1.4% in the first three months of 2022, surprising analysts who expected positive growth of 1.0%.³

Though a single quarter of negative growth isn’t a recession, it’s a sign that inflation, the Ukraine conflict, and the pandemic hangover are weighing on the economy.

Realistically, some form of a slowdown was probably inevitable, given the massive economic recovery of 2021.

And, the news isn’t all gloom. 1) This is a preliminary report, so we’ll see revisions later. 2) Economists still believe the economy has plenty of room to grow, particularly given the strength of the job market, so the economy could rebound. 3) Americans are continuing to spend.⁴

The economy is still strong, but it’s showing cracks. We’re watching closely.

You can see a theme: markets are being driven by worry and fear.

Is the selling done?

That’s impossible to say.

Could we see a bigger correction or bear market?

Absolutely. That’s very possible.

Corrections and pullbacks happen very frequently.

Here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance. (You’ve probably seen this chart before.)

Take a look at the red circles to see the market drops each year.