By: Jeff Anderson, CFA
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||2.9%||1.4%||92.15%|
Source: Wall St. Journal
It was another down week for the major indices (Nasdaq had its worst month since 2008!) as investors digested weak economic data and a mixed bag of corporate earnings. Google and Amazon disappointed investors while Microsoft, Visa, and Facebook (now “Meta”) exceeded estimates. If you look under the hood at the major indices, plenty of stocks are down well over 40% year-to-date. Stock prices of companies like Teledoc, Zoom Video Communications and Netflix are now below their pre-covid levels. All those gains, which were significant, have disappeared. It goes to show you that only owning one or two stocks in your portfolio can do considerable damage to your financial health. Those companies are all part of at least one index. The indexes themselves (which consist of many companies) are down a fraction of that.
With continued lockdowns in mainland China, and the ongoing Ukrainian conflict, prices for goods and services are likely to remain elevated for the foreseeable future. That puts pressure on the Federal Reserve to continue raising interest rates and this is weighing heavily on investors (or should we say “traders”) minds. The probability of a recession in 2023 has increased as well. Recessions are part of the economic cycle. They come, and thankfully, they go. It’s never fun when it happens but it does pass. Mr. Powell and his team at the Fed are likely to be aggressive at the next two Fed meetings. Whether that tips the US economy is anyone’s guess. It bears reminding that when coming to investing, taking a long-term view is paramount. Warren Buffet never makes investment decisions based on whether the economy is headed into a recession. He simply buys good companies with great long-term prospects. An important caveat is that many of his most famous investments were made during tough economic times. That is typically when the best bargains can be had. That’s how retirement investing should be viewed. Own good companies let time be your friend.
GDP Growth was Negative in Q1:
That’s right, the economy went backwards. All this talk about when the economy might tip into a recession later this year or next and we just discovered that the economy was already slowing dramatically. I don’t recall reading anyone predicting this. It takes two consecutive quarters of negative GDP growth. So, technically we’re halfway there. As we’ve said before, the market is a discounting machine. The major indices peaked in late 2021. Maybe we are headed into one. It takes time for the economy to respond to changes, sometimes by as much as 12 months. The end of the government’s stimulative measures and persistent high prices for just about everything are weighing on the economy. That’s one explanation. On the other hand, when you look under the hood, the reason for the decline in GDP was due to a widening trade deficit (imports surged and exports didn’t keep pace). The US consumer is still in very good shape. Americans are sitting on plenty of cash, are employed, and living in homes with considerable equity. Retail sales continue to chug along. Demand for durable goods (like washing machines and cars) are still strong, but many are pushing out purchasing decisions because supply shortages are driving up prices in the short term. Call it pent-up demand. Check out the chart on GDP growth from the Wall Street Journal. Growth in the economy is still expected, even considering the dramatic jump in prices for all kinds of things as seen chart from our friends at First Trust Advisors.
Source: Wall Street Journal
Source: First Trust Advisors, L.P.