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Podcast #19: Market Updates & Inflation

June 21, 2022

Listen to the podcast below to hear Jill talk about

  • Current market environment
  • Inflation
  • Jill’s Good News segment

Script:

Hi Everyone

I want to touch base with you regarding the current market environment. Obviously, it is more difficult to watch your portfolio decline than go up. A bear market is defined as a loss from an index high to its current return of minus 20% or more. We have reached that point.

According Barron’s Magazine on May 16, there have been 10 bear markets since 1957. They average 391 days and the average percent of decline was 39.6%. Only in hindsight will we know how this bear market compares to the averages.

The bear market is largely a result of the Fed raising interest rates. What is important is why is the inflation rising and interest rates increasing for the first time in 50 years?

Inflation is high largely BECAUSE the economy is strong enough that people keep wanting to buy goods and services. It is a response to the pandemic supply chain shock, demand exceeding supply post pandemic, the unexpected China zero COVID policy and the surprise war in Ukraine. This is not the same inflation issues we faced in the 1970s.

For example, according to Dr. David Kelly, chief global strategist for JP Morgan Asset Management, one of the problems with gas prices is a result of a shortage of refineries. Many have been converting to biofuels so were unavailable when gas demand increased. He just hopes we don’t have a bad hurricane season which would exacerbate the issue.

Corporate profits remain strong, though are expected to slow. The value of a share ultimately is based on the value of the company. Right now, the market is reacting to the inflation headline.

There are always winners and losers in these situations. Think about airlines. The demand is high but there aren’t enough pilots so flights are packed. And, the airline companies keep raising prices because they can. We would anticipate they report record profits.

Suppose you haven’t seen your family in 2 years. Once you travel to see them, are you going to do it again in 6 months? This would be an example of the demand declining and becoming more aligned with supply.

The Fed, in their forecast show interest rates will be reduced in 2024. While forecasts change, it says to us inflation will likely be down to justify an interest rate decline.

So where does this leave us? In the long run, buying stocks today is buying them on sale – that doesn’t mean the sale price won’t go down more but no one knows when it hits the bottom before going up.

If money is needed in the short-run, short-term bonds are used to reduce portfolio fluctuations so we don’t have to sell something at an inopportune time. That is why we always ask if you anticipate needing money. Also, for your ready cash, watch money market funds. It is likely they will pay some interest with rising rates.

In the midst of the decline, it is human nature to want to sell and move into cash. This is not a good alternative. Right now, gains and losses are all on paper and change daily. If you sell a security the gain or loss is real or what we call recognized. It will be part of your income tax return.

The other part to the equation is if you move to cash, when do you go back into the market? Most people are invested because they need growth to support their lifestyle. You can’t time when to get back in.

Dr. Kelly looked at bear markets over the last 100 years. He found the average length was 14 months. However, the markets were up on average for the following 47 months!

The most logical course though emotionally difficult is letting your asset allocation ride. With dividends and interest, you’ll be reinvesting – buying shares at a cheaper price.

Previously, I mentioned taking a cruise to Alaska that was originally scheduled for 2020. It was wonderful. Unfortunately, masks were not required though we wore them except at meals. Still, 2 days after we returned, Bonnie and I came down with COVID. Bonnie has a cough and has lost her sense of taste. I have nasal congestion which is why my voice may sound different.

 

Now for some good news.

An Italian firm called Mold created a tool called River Cleaning. It captures plastic waste from a river before it can reach the ocean. The manufacturer had to overcome many obstacles including allowing boats to pass without hampering the gathering of plastic waste.

The Guinness Book of World Records identified the youngest published author as a 5-year old British girl named Bella Dark. Her book is called The Lost Cat and has already sold 2000 copies. Way to go!

As always, please feel free to get in touch with us.

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