10/23/22
Good evening friends,
I hope this email finds you well.
Immediately following my last email the market rallied over 10%. It then preceded to drop 19%, which put the market at a two-year low and the longest bear market in 13 years. Needless to say, this market has not been for the faint of heart.
In my last two notes, I have been very clear to not be fearful of this market but rather to be more aggressive. After the rollercoaster ride of my previous email, the market is down 4.5%. I remain steadfast that this is a time to be adding money to portfolios and increasing aggressiveness (relative to your risk tolerance and goals).
My conviction lies within an understanding of why the market is where it is. What drives the market is often a series of events as opposed to a singular headline. In this case, the market is lower as a result of higher interest rates. Higher interest rates are a result of higher inflation. Higher inflation is a result of...well, that one can be debated but is ultimately caused by a number of factors.
The Federal Reserve (Fed) has been raising interest rates every six weeks since March 16th. It will most likely raise again on November 2nd. Many of my colleagues feel that ‘you can’t buy stocks until the Fed is done raising rates.’ I strongly disagree. The market is always going to move well ahead of the Fed. There is no better example than the bear market we find ourselves in. Inflation started to become an issue towards the end of 2021 and the market started to anticipate the Fed needing to raise rates to fight inflation. So much so, that the market dropped 15% BEFORE the first rate hike in March.
Therefore, just like the market dropped before the Fed started, it is my opinion the market will bottom and begin to rally before the Fed stops. So, when might the market start to get the sense that inflation is indeed taming, which would allow the Fed to stop? I think it already has. The first two components that led to the highest inflation in 40 years were: global shipping rates and used car prices. Shipping rates have dropped 70% from their peak and used car prices are down 10% on the year. Furthermore, roughly 1/3 of CPI (the most widely used measure of inflation) is shelter. Data clearly shows that housing prices and rent have plateaued and are actually dropping in many areas of the country.
No one has a crystal ball. The most we can do is take the data that we have and try to figure out the path of least resistance. In my opinion, the data says inflation has peaked. If that proves to be the case, the Fed won’t be as aggressive as feared and the market has substantially more upside than downside over the next year.
As we start a new week, my thoughts continue to be with all of my friends on the Gulf Coast. We wish you a speedy recovery. As always, I am here for you all!
Regards,
JC