Well, here we go again. Morningstar market index, it’s down a year to date -17.7%. Are we in yet another bear market?
With the S&P 500 down over 16% and other indices looking even worse, what does this mean? Well, there’s a lot of pressure on all markets. Interest rate hikes are necessary to fight inflation. Inflation is at 8%, maybe higher. We have what’s called an inverted yield curve. It’s a strong leading indicator of recession. There’s a war in the Ukraine and it’s having severe impacts on the energy markets, which is further feeding inflation. And then we have corona lockdowns in China, which may not seem to be relevant, but they’re having a significant impact on supply chains over and above the regular transit challenges that exist.
The probability of a recession in the next six to 18 months is extremely high. The Fed will do everything it can to execute what they call a soft landing, but there’s no time in history when a 2% or greater rate hike or a drop inflation of greater than 2% as a result of a rate hike has not resulted in a recession, or as they like to say, when the Fed taps the breaks, somebody’s going through the windshield.
So why not just jump out of the market right now? Well, there’s your million-dollar question. There’s a case to be made. We’re already in a recession. GDP in the first quarter of the year did contract. If it’s continued, then we’re definitely already in a mild recession. Markets anticipate recoveries. Jumping in and out of markets is more art than science. To me, I always equate it to jumping off the railroad tracks and getting hit by the train coming in the other direction. And anyway, where are you going to go? More bond exposure means more exposure to rising interest rates, bonds mature, or cash, we’re guaranteed permanent loss of 8% due to inflation. Really the only game in town in an environment like this is a well-diversified portfolio with equity exposure, because though equity suffers pain, it always recovers if it doesn’t go out of business. And in a diversified portfolio, they’re not all going to go out of business. So, as I like to say frequently, this too will pass.