In 2021 the S&P closed at a record high a total of 70 days. Only one other year (1995) had seen more record highs. We are a long way from January 4th, 2022, when the S&P peaked at 4,793. Although today we are seeing some recovery of markets, we are still more than 21% off the near-term highs of January 2022.
The main questions I am getting from clients and other investors these past few weeks has been? When do we buy in? Since most of our clients were positioned very conservatively in both large cap value orientated stock and short-term income at the tail end of 2021, we are in an outstanding position to turn up the volume for client portfolios … but is now the right time? I’d argue that nobody really knows the answer to that question.
There are several factors that have been weighing on economic conditions:
- Supply Chain – Supply chain shortages are not a new issue. If you remember, many news stories in the early days of the pandemic were about toilet paper and things like hot sauce. Whereas now computer chips seem to be harder to come by.
- Inflation – Housing costs, food costs, gasoline, electric, airfare have all spiked within the last year. This doesn’t seem to be slowing down. The Federal Reserve has indicated that in addition to the ¾ point jump in the overnight rate targeted at the last meeting, it is their intention to increase rates at roughly ½ a point each meeting for the foreseeable future. Increases the likes of which we have not seen since the 1990s. The Fed has stated that their goal is to return inflation to ~2%.
- Gas Prices: Much of the recent surge in pricing seems to be contributed to refining shortages due to Russia’s war on Ukraine. The resulting actions limiting Russia’s ability to sell oil has also caused a 30% increase in refining costs for gasoline. Not all crude oil is the same and some refineries specialize in the type of products shipped by Russia. Those refineries are certainly not operating at capacity…if they are operating at all.
- Worker Shortage/Wage Pressure: The availabity of employment has been robust for the last few years, pushing employment to record lows and wages to near term highs. Current unemployment levels at ~3.8 percent (May 2022) are historically too low to keep inflation at bay. Some economic modling suggests that unemployment rates would need to return to 4 – 5% before inflation returns to ~ 2%. Which suggests that there is some pain to come for both the economy and employment.
Generally, I agree with most economists and the Federal Reserve, it looks to me like a recession is “baked in the cake.” There are simply too many factors weighing on economic growth in the coming quarters and the Fed is determined to reign in the demand that is causing inflation right now. It is also important to remember that humans are horrible at predicting economic conditions and even worse at predicting market reactions.
In the last few weeks, I have begun engaging clients in discussions surrounding increasing the overall risk in their portfolios, but we plan to do this gradually over the next 8 to 12 months. Many of our clients decreased their equity allocations by 20 to 30% during 2020 and 2021. These levels need to be returned to “normal” at some point and since I don’t have a working crystal ball, my current assessment is that the bottom of the market is probably sometime in the next year. Spreading allocations out over the next 8 to 12 months allows us a lot of time to reevaluate if conditions change.