So far in 2022, we have experienced a wild ride in the stock market. We started the year by going down 20% or so over 6 months, then we recovered half of those gains in the next 6 weeks or so, only for the market to fall back down below it’s previous lows. As of this post being published, the S&P 500 is down around 21%.
So what in the world is going on? In today’s post, I am going to explain some of the factors I see affecting the economy and the stock market, and then give you some action items at the end. Please note, none of this is prediction of what will happen next, as I have no idea, that pundit on CNBC has no idea, and it is foolish to play that game.
Over the last few years, we have seen extremely high inflation, driven by a number of factors. There’s the pandemic which slowed down production of goods, there’s the influx of money by government stimulus bills, high wages from employers in response to the leverage employees had in negotiations, and more.
Lowering inflation is a key goal
The Federal Reserve Chairman, Jay Powell, has stated that these high interest rates are a big concern to him, and he wants to raise interest rates to slow down spending.
His philosophy is similar to how when gas prices peaked this summer, people simply drove less. They took less trips and chose to stay home or try alternate means of transportation. When prices get too high, people will simply stop spending money. That in turn helped lower gas prices, along with of course using some of our oil reserves.
That’s what Jay Powell, the Federal Reserve Chair, is trying to do on a broader view. He’s trying to make interest rates higher so that people will stop spending as much, so that companies will hire less, some will stop completely, and others will have to lay people off. In his own words, it won’t be pretty, and it could be painful.
The general hope is that as people spend less money, it will bring down inflation, which has been stuck in the high single digits for over a year. Powell’s goal is to reduce inflation to 2%. But to do that, we need a serious decrease in spending.
What Happens next: A soft landing or hard landing?
The question then becomes will we have a “soft landing” or a “hard landing”? Ie, will we only experience minor economic contraction, along with minor amounts of layoffs and a small increase in unemployment? Obviously that is preferable, and that’s what people mean when they say they expect a soft landing.
However, it’s not assured. Many think that the increase in rates that Powell is leading will cause an economic recession, if we aren’t already in one. That will mean drastically decreased economic growth and much high unemployment, and a lot of pain for the people who will be laid off. Loans will be more expensive, credit card interest rates will go up which will disproportionately hurt people who have been laid off and can’t pay their bills, and we could go into a lengthy and full blown recession. That’s the hard landing scenario.
Neither scenario is pretty, but that’s basically what we’re looking at at this point in time. As a result, the stock market has responded to these negative scenarios by pulling money out of the market, and depressing prices further. So now we’re down around 21% year to date, and we absolutely could go lower. It’s important to note that there is already a lot of bad news baked into the current price of the market.
Lastly, before we wrap up, I should say that not everyone is in love with Powell’s strategy. Some think that he was basically promoting economic stimulus last year in an already overheated economy, and in less than a year after supporting those policies, now he’s essentially trying to lead us into a recession. In other words, it’s a drastic and abrupt change in course, and doesn’t lead to much confidence in him when his actions changed so quickly. That said, unless he resigns, he’s the person we’ve got in charge, and the vision he wants will be the one implemented.
what you should do now: 4 action steps to consider
1. If you’ve got cash above your emergency fund, consider putting it to work on a monthly basis. If you want to put it all in while the market is down 21%, that’s a good strategy. But it can also make sense to put your money in over a 3 or 6 month period (same dollar amount every month) until we get more certainty on how bad the short term will be.
2. Please, unless you desperately need this money ASAP, please hold on and don’t sell.
3. This may be a longer bear market than normal. No one knows. But if you are already retired, make a plan for where will you take out money if you need it. Do you have extra cash on the sideline? Is there anything in your portfolio that isn’t down as much as your other holdings? If so, consider using that to generate income while you wait for your other holdings to recover. You’ve also got to consider the tax consequences of taking certain investments from certain accounts, as that plays an important role in your financial picture.
4. If you are 5-plus years away from retirement, frankly, this is good news to you, and you should do what you can to sock away some extra money during this period. If that means cutting expenses that aren’t necessary, I think you gotta consider it. I personally am finding ways to cut my budget so I can put more into the market right now.
And that my friends is all I have for today. Stay strong, we will get through this!
If you would like help navigating everything going on, I’d be happy to help. You can schedule a no-obligation call with me here.