For those who follow the trends that make up the world of investing, there is always a huge supply of opinion. A lot of that is good, a fair amount is bad, and some is just undecipherable. If one were to look for the dominant strain of what influences markets most, we would find that the answer, at any given moment, rests somewhere between fear, greed, and uncertainty. Although it carries the least amount of linguistic baggage of the three, the biggest bogeyman is probably number three: Uncertainty. The reason is that both fear and greed are market-movers while the effects brought by uncertainty are unpredictable.
Repeatedly and throughout history, there have been times where it has become quite difficult to keep the four corners of reality nailed down. And in each case, always there was/is a co-incidental lack of clarity, social, political and/or economic. Interestingly, the Chinese Mandarin language uses almost identical characters for ‘crisis’ and ‘opportunity’. However you may describe it, when uncertainty rises it means that ‘things’ are in a state of flux.
Take a look around and you’ll see a staggering number of places and things where the current state of affairs can only be described, in polite language, as ‘fluid.
- Inflation: Running at 40-year highs. Fed policy is to get this ‘under control’ by ‘demand destruction’, which is done by choking off access to credit. (Rising rates, making money more expensive.)
- Fed Rates: Analysts point to the need to get the fed Funds Rate higher than the Inflation rate. Not easy to do.
- The U.S. southern border: Upwards of 2 million arrivals are here and are unlikely to be going home (at least anytime soon). So, politics aside, ultimately, they will be either benefactors or beneficiaries to net GDP. Absorbing arrivals into the workforce is and will continue to be one of our major challenges.
- The Covid Pandemic is mitigating but its effects are lingering — impacts on workforce among its greater contributions. (And in China, 60 million people are in some stage of ‘lockdown’).
- Ukraine/Russia War: Nobody knows how this will end up. But we do know that Russia (Putin) is having a much tougher time of it than expected. One unintended consequence is Russian energy is no longer reliably available to Western Europe. (Sidebar: in August, the most searched word on Google in Germany was the German word for ‘Firewood’!)
- Energy: A plethora of issues contributing to ‘unknown’.
- U.S. Mid-terms: Already the mud-slinging has reached demoralizing levels.
- Trust in institutions: is shall we say ‘wavering’?
So, what to make of it all? Well, we can only answer this from the perspective of what are our duties and responsibilities at Denk Strategic Investment Partners. One thing we always keep front and center is that ‘No matter how rough things may get, the Sun is (nearly) always shining somewhere”. Fortunately, we have the staff and the resources to keep track of where those might be. Also, paramount with us is the absolute goal of wealth preservation. Only with that under control, do we then look to risk-balanced opportunities for growth and enhanced returns.
Nobody said it was going to be easy. And if they had, we would not have believed them. We appreciate your faith and your trust. And we feel fortunate that our performance has earned that trust.
Ron’s Market Minute 9/16/2022 — No Rays of Sunshine
This has certainly been an interesting week. We’re all hoping for some calm after this mid-week produced some of the worst days for markets ever since the incredible volatility driven by the pandemic action we saw in 2020.
When I checked yesterday the sell-off left the S&P Index* down 17% and the tech-driven Nasdaq Index down 26% for the year- so far. The broad selloff pulled every asset class down from stocks and oil to crypto and gold. This is one of those times that I would expect the phone to be ringing, but it’s not. What happened? Are clients thrilled to be down less than market indexes? Let me remind you that it’s not so much what actually happens as how the markets REACT to what happens. So, there were widespread hopes that this weeks’ inflation print would come in weaker than expected, which would mean that the Fed could possibly (eventually!) ease up on its tightening cycle, but that does not appear to be the case now. AND it may even become more aggressive. The big deal was that the expected CPI print was 8.1% year over year. The actual print was 8.3%. Yes, gas prices have come down, but a lot of other sectors including housing, tuition and medical costs are experiencing price pressures. These numbers are the last official numbers for inflation before the Fed meeting next week.
The current expectations are that we’ll see a raise of 75 basis points at the September meeting, which gives more weight to the case for a real recession around the corner, and less of a chance of a so-called ‘soft landing’. Let’s give you something to watch: This morning’s read on the yield of the 2-year Treasury note — It’s showing 3.87% right now. That’s not a typo. I remember not long ago the rate on a 2-year was under 1%. Wow! Remember that the Fed typically follows this rate when setting the Fed Funds Rate, and the 2-year rate usually peaks before the Fed stops raisings rates. In plain English, with the 2-year making new highs, the markets see that the Fed may actually hike more and for longer. We already know that the Fed has been quite aggressive, and many of the results of the last recent hikes have not yet filtered into the economy.
It’s likely that we’ll need to see the 2-year (and other interest rates) peak and turn down before we see a meaningful bottom in the markets. So now you have something easy to watch (Yahoo Finance, Bloomberg markets or similar). Finally, today is one of the monstrous quarterly options expiration days when trillions of dollars in derivatives expire. (Known as triple witching Fridays) It is most often volatile and to the downside, especially when the days leading up to the expiration day are weak. And next week is often also a weak week. The bulls must be thrilled. (NOT!) And one last ray of sunshine.
The odds are becoming higher that markets will likely find a major bottom, or perhaps THE major bottom in October. After that the scenarios will typically become more enjoyable.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk