It is hard to avoid the headlines last week and today after a tumultuous first 4 months of the year regarding the performance of all US stock markets with the Nasdaq market declining the worst. There are many concerns including this last week’s negative GDP number, a big surprise to analysts and markets. Volatility continues with sporadic gains of over 1% followed by 2% losses. The panoply of concerns always seems endless at times like this. Memories can be short, a human bias called recency bias.
March 2020, merely 2 years and 2 months ago, we experienced our last recession we over a 30% decline in market averages. Streets were empty, stores were closed, offices closed. My wife and I would walk around San Francisco and she would document the empty streets that months ago had been filled with pedestrians and traffic jams downtown. At the time and for months after, it felt like it would never end. It wasn’t only Covid but political turmoil that was also swirling around America with the 2020 Presidential election ahead of us. So much uncertainty loomed ahead.
Well, here we are again. It is hard to see how this will ever end; no one has a crystal ball. So many concerns and I will not list them because we are all aware. Is this time different? Let me be the first to assure you the concerns will end and the world will not. This feeling of doom and negativity is hard to shake as it happens. Like the feelings of exuberance, that good times will go on forever. Human nature serves us well with many traits, but understanding how we feel now under current events is nearly impossible to compare to how we will feel after circumstances have changed, and circumstances can, do, and will change. So here we are. As advisors, we have been here before and the guiding principle for us is: unless your goals or life have changed since we recommended an investment allocation we will weather this storm similar to other storms that came before.
In the meantime, as we face an interest rate increase from the Fed of ½ point this week, US Treasury interest rates did not continue their climb. Often markets take into account news before the actual news occurs. Common wisdom says markets are discounters of future events. The risk of recession is much discussed and certainly is a possibility. Our last recession in 2020 lasted 2 months. Recessions are part of our economic DNA even though we had a long period after the financial meltdown, with no recession, only tepid growth. Maybe those two economic trends are related, is historically slow growth protectionary against more severe slowdowns? With the economic recovery from the Covid slowdowns and the historically high GDP growth rates, maybe the chances of a recession increased.
As we mentioned, the latest GDP report headline number was scary and surprising. As pointed out in Barron’s this weekend:
“The markets immediately looked past the latest number as being due to special factors: a surge in imports that had been delayed by the backup at docks, a slowing in inventories, and shrinking government spending after the end of the massive stimulus last year. Stripping out those factors, real private domestic final sales—what the Fed influences—actually grew at a stronger, 3.7% pace in the first quarter than the 2.6% in the previous period.”
This is a reminder that unemployment is at record lows and consumer spending continues to rebound. Revenge travel is happening along with robust demand for other goods and services including motor vehicles. Supply chain problems continue but as we work through those the underlying strength in the economy could carry us through even a recession caused by war, covid, supply chain, and inflation.
References: How Often Should I Check My Accounts and Loss Aversion
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