Happy Summer!
It has been a time of milestone events for my family. Jake and Gabi both graduated university, Jordan graduated high school, and I coached my last kid’s youth soccer game as Jordan’s team won the U18 provincial championships. Of course, my daughter also got married last week!
It has been a busy month, full of reflection as we sailed through the important occasions. Lots of anticipation and anxiety about what the next phase of life will look like, but most of all, I have this sense of awe at how fast time flies!
Maddie’s wedding was a joyful day. I think there was some extra pep in the party because it was the first big gathering for many people since COVID hit, and of course, the added significance of it being my daughter’s big day. What was not so joyful was the final wedding bill I got! It was roughly double our initial estimate when we first started planning for the big event last year. My wife was apologetic. My daughter just shrugged her shoulders and told me, “Inflation Dad, what can you do?”.
I definitely paid the price for leaving the planning to Maddie and Kristy – I am sure that a $1500 candy bar was not in the original budget, but she’s not wrong either. There’s a meme going around social media I saw that sort of encapsulates the inflation picture. “The cost of filling up my car now feels like a trip to the grocery store, the trip to the grocery store now feels like a Costco visit and my trip to Costco now feels like a mortgage payment. But that’s ok, as I can’t afford a home anymore anyhow!”.
Inflation is wreaking havoc in the markets right now.
It was 5% at year-end, 6% in January, 7% by April, and June came in at a 40-year high of 8.6%! I wrote in my last commentary that we were off to the worst start to a year that I could remember. At the halfway point of the year, when I look at market numbers, I sort of feel like I am reading a murder mystery novel with the market as the victim of a violent crime. World markets are all down over 20%, tech is down 40%, and healthcare is almost down 50%. Bond markets are down 12%, long term bonds are down 20%.
Every single sector is down except energy, and even energy is off from its high. Cash is safe, but you just lost 8% or so in purchasing power right now for anything left in savings. It is carnage right now! The correction, dip, crash, or whatever you want to call it in markets right now is not unusual in and of itself. I’ve written at length that the market will continually cycle through its highs and lows. The fact that there is no safe place to hide makes this particular version especially painful! Diversification is not helping this year, with typically non-correlated asset classes all falling together.
Think of our economy as a fire we want to burn at a controlled rate to keep investors and consumers warm. The government uses various strategies and tools to keep the fire going. Fiscal and monetary policies, like lowering interest rates, extending credit, taxes, and public spending, are all stimuli used when they worry about the fire going out. It is relatively easy to keep a fire going with these “accelerants” judicious use. When inflation gets out of control, the government will step in to try and control the fire. It is one thing to stoke a flame and quite another to dampen it. Think about how difficult it would be to try and reduce the size and scope of a fire without putting it out altogether, and you will have a better idea of why investors are worried right now.
At the best of times, governments have a terrible track record of getting the balance right between quelling inflation and killing the economy,
Typically we have moved into a recession when shifting to a contractionary economic cycle. It is incredibly complex today in that if you think of the market as a murder mystery victim, there are too many potential suspects for the crime. Is inflation caused by the global pandemic, too much fiscal stimulus for too long by governments and central banks, the war between Russia and Ukraine, or ongoing supply chain issues? The probability of recession continues to rise with each successive month that inflation goes up, while investor sentiment drops proportionately alongside it. We are near multi-decade lows in investor confidence, and markets reflect that.
I genuinely love my job, but there is no question there are some hard years, and 2022 has been one of the worst so far. I take some solace in the fact that at least I am not an economist! Amid all the economic indicators and signs of recession, an economist has got to make sense that somehow the biggest problem in the economy continues to be how to attract and retain workers. June’s US nonfarm payroll rose by 372,000 jobs, far above expectations and making a mockery of claims that the economy is heading into recession with the unemployment rate near all-time lows. I have no idea how to interpret all the data. I really love the adage that “an economist is someone who will be able to explain to you tomorrow why the things he predicted yesterday didn’t happen.”
I was helping my youngest son, Jordan, pick his university courses. He’s planning on becoming a financial planner down the road.
He’s going to do a degree in business, and economics, stats, and finance are all classes he needs, but my recommendation was to minor in psychology. The behavioral side of investing is just as important as the analytical piece.
There are way too many uncontrollable/unknowable/unpredictable pieces of financial data to interpret correctly.
All you can do is give your best-educated guess on short-term direction, and you will be wrong a good chunk of the time. What is controllable is your reaction to what is going on. Your ability to be resilient and brave and look through headlines and feelings is more important than understanding how GDP is calculated.
As a financial planner, I don’t need to be right on where the economy is going in the short term. We need to get the right assets into your account to meet your needs over your lifetime. There isn’t one number we need to hit or target at an exact moment. We need your portfolios to meet financial objectives and obligations through your different phases of life. We have a discipline and process on how we go about building the portfolio. When the market behaves unexpectedly, and the unexpected is such a regular occurrence with markets, I’m not even sure we can think of it as unusual; we have a game plan. Times like this are painful, but they set us up for long-term success.
Watching my little girl get married was a reminder that time goes quickly! Put the work in now with regards to the commitment to the process. Don’t panic and sell good companies based on emotions. Nothing is “lost” unless you sell. Markets always return to the fundamentals and fundamentals right now are good. Hold firm and trust in the process. Opportunistically this is the time to try and take advantage of market inconsistencies.
We want to make rational purchases from emotional sellers through adding new money or rebalancing. We want to be buyers when fundamentals disconnect from valuations.
Your kids’ character is formed by going through trials and tribulations. Painful to experience, and we’d prefer to avoid them if we can, but we know that life is impossible to predict, and we don’t begrudge them going through hard times because we know it is necessary for growth. The time for celebration will come again soon; we need to put the work in now!
Jeremy
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