Last week ended with the realization that inflation hadn’t peaked. This week began with markets pricing in a 75 bp rate hike based on a whisper from someone who was in the know. The Fed’s hike puts the U.S. on the steepest tightening path in the G-10, up 1.50% so far this year. To slow inflation and rising prices, the Fed needs to reduce consumption demand. As demand cools, companies take note and start to reduce spending, and then as a second step, curtail employment. This causes the economy to shift into recession which can quickly reduce corporate profits.
Recent Sell Off is Comparable to Some of the Worst Ever
Investors have seen this movie before. As risk appetite abates, selling to protect capital causes a bear market. This week’s selling by investors put the S&P 500 Index squarely into bear market territory, down more than 20% year-to-date as of 6/17/2022. Deteriorating investor sentiment left 9 out of 10 stocks in the S&P down for the week. The tech-heavy NASDAQ has fared even worse this year, down more than 30% as high valuations came crashing back to Earth. Even the FAANG darlings have lost significant value and hurt many investors who chased return right up through Q1 of 2022.
Mortgage rates have jumped up with 30-year fixed rate loans averaging just under 6.0% according to http://www.bankrate.com. It’s no wonder refinancing is at a standstill, and new housing starts and new and existing home sales already slowing. The price of gas at the pump has not helped consumers or the inflation picture as tight supply, government policy, and sanction restricted capacity keep the price of crude firmly above $100.00 per barrel. The backdrop of high inflation led by high prices at the pump and rising food prices will quickly push the U.S. economy into recession, if we are not already there.
Most prognosticators are calling for recession in the 2nd half or end of 2023, but as we see the data deteriorating we see a recession becoming a reality before year end. Investors need to remember the bull market and asset bubbles were created by the Fed’s “zero interest rate policy” and QE bond purchase program. As long as the Fed’s easy monetary policy was in play the market had the backstop needed to surge ever higher. Without that support the markets will fall hard and leave investors who try to buy and hold out of luck.
It’s time to keep your cards or your money close to your vest. De-risking to prevent large capital losses that will take years to overcome is just good common sense. WBI’s active cash hedging process does this work for you. The cash hedging software system seeks to reduce risk as stock and bond prices fall, not to prevent all loss, but to limit losses to a manageable amount. By maintaining a larger capital base, it can be easier to overcome smaller losses and get back to positive return production. We look forward to helping you and your clients manage through the inflation/recession market cycle to preserve their retirement funding.
Unless otherwise indicated, source of all data is Bloomberg, as of 6/17/2022.