By: Jeff Anderson, CFA
|Close||Weekly return||YTD return|
|Nasdaq Composite||13,711.0||-3.86%||– 12.36%|
|US Treasury 10yr Yield||2.713 %||32.2%||119.3|
Source: Wall St. Journal
The major indices gave back some of the gains from the prior week. Inflationary fears persisted with economists and equity strategists worried that inflation levels will force the Fed to keep raising interest rates which could tip the economy into recession next year. As of now, the probability of recession (provided by Estrella & Mishkin) remains well below the levels seen in late 2019 or mid-2021. Economic and geopolitical uncertainty will likely continue to weigh on markets in the short term. The yield curve has inverted (meaning the yield on the 2-year treasury note is higher than the 10-year note. This, historically, signals a slowing economy and heightened risks of a recession. However, equity markets have, on average, rallied for at least a year after the government bond yield curve inverts. Yet, as we mentioned on our podcast, analyst buy ratings are at multi-decade highs. The last time that happened was in September, 2011just after the market had sustained a roughly 12% correction. The major indices moved considerably higher over the following 10 years. This is not to say that the markets will perform similarly, but rather that trying to time the market can be costly. There is no crystal ball. Just history to guide us.
Warren Buffet is Investing During this Market Correction:
Despite the terrible start to the equity markets in 2022, Warren Buffet has been putting money to work. Berkshire Hathaway bought stakes in Occidental Petroleum, HP, and is acquiring all of insurer Alleghany Corporation. All told, these investments amount to almost $24 billion. At the end of 2021, Berkshire was sitting on over $145 billion in cash. For those of you who have followed Warren Buffet over the years, you know that he doesn’t make investment decisions based on macro-economic events. He simply like to buy (or invest in) companies that have favorable long-term business characteristics. The market correction didn’t prevent him from making investments. That is a good message for investors.
“Interest-Rate Surge Ripples Through Economy…”:
As the Federal Reserve embarks on lifting interest rates, the cost to purchase homes and autos have surged higher. Mortgage rates are approaching 5%, up from 3% at the start of the year. Rates are still low historically, but the sudden increase is making it harder for many to purchase homes. Same can be said about auto loans. As for as homes are concerned, prices would need to decline to make it affordable. In areas like San Diego, the low supply of homes coupled with low rates pushed prices higher. As rates move higher, it should push some potential buyers to the sidelines which “could” bring down the price of homes. For buyers who can’t wait, they may be forced to look for smaller homes or areas further away from metro centers. Given how much home prices have increased over the past few years, a pullback would not be abnormal, and should make some areas more affordable again.