Recession And/Or Stagflation On The Horizon

The Federal Reserve “FED” increasing interest rates to choke off inflation is the cause!    

A brief review of economics 101:  prices of goods and services brings into balance demand and supply.  On the demand side of the equation, The FED announced in early 2021 that it would begin the process of raising interest rates to reduce demand in the US economy.  We are now seeing housing demand easing as well as prices of many commodities.  However, energy and food prices continue to rise putting pressure on households’ monthly budgets.  If oil and gas supplies are not increased globally, prices will likely remain at elevated levels.  This result likely will be gloomy consumer confidence and less disposable income for other purchases

Recession versus Stagflation:

The common variable between these two economic conditions is lower economic activity.  In the case of recession, economic activity declines for at least two consecutive quarters.  Prices typically decline, and inflation is put to rest.  Stagflation on the other hand is characterized with inflation and a very low economic growth rate. 

The stock market may have established a bottom if the US economy averts a recession.

The Dow Jones Industrial Average “DOW” has been trading in the 31,000 to 33,000 rangeThe stock markets valuation is back to average with the price-to-earnings ratio of 15-16x.

We are optimistic about the stock market for the next 18 months! REALLY? Yes, we are!

Investor and consumer sentiment indices are approaching extreme negative readings.  And when this occurs, almost with out exception, markets reverse and turn positive over the subsequent 18 months.  When the negative components of the outlook begin to turn positive, the stock market typically responds positively.

Richard S. Lawrence, CFA / June 15, 2022

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AS ALWAYS
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).

PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES!