08/03/2022 State of the Financial Markets

As summer begins to wind down, we feel it is a good time to provide some thoughts on the
financial markets.

There has no doubt been a lot of information to digest since the start of the year. The best way to understand the state of things is to steal the phrase from an old Clint Eastwood movie: We are all dealing with “THE GOOD, THE BAD and THE UGLY.”

We’ll take a few minutes to discuss each of these, but at the end of the day, it’s anyone’s guess
as to what happens from here. Literally both the stock and bond markets could be 10% to 20% higher or lower from here. Much depends on reading the Ti leaves of the Federal Reserve.

Will they continue to withdraw monetary stimulus, creating tight money; will they continue to raise rates into a slowing economy; or will they eventually pivot and do the opposite? The
answer to these questions could actually be the difference between a large gap between where the markets stand today, S&P 500 4100, or 10%-20% higher/lower.

​First, THE GOOD…

1. Second quarter earnings were not quite as bad as feared, investors reacted positively.
2. Federal Reserve, in its last meeting, hinted toward being at neutral rates.
3. Investor sentiment has been very poor over the last few months. Often a contrarian indicator.
4. The United States appears to be the cleanest shirt, with Europe and Asia showing increased signs of difficulties to contend with.
5. While interest rates have been rising all year, recently they have stalled out and fallen somewhat.
6. Corporations, as well as consumers, appear financially stable.
7. Price-to-earnings levels, while still high compared to historical standards, have come down to healthier levels.
8. Earnings from large mega cap technology stocks, while not great, were received with rising stock prices…considered by bellwethers to be a positive sign.
9. Easy money has eased, and so typical bubble phrases start to diminish within financial newsletter communities.
10. No doubt there is more to add, but this should help get the point.

Second, THE BAD…

1. Oil and commodity prices, while having fallen over the past couple months, remain elevated.
2. The typical 60% stock/40% bond portfolio is down roughly -12%1
   1. This begins to hinder spending over time, investors lose the wealth effect.
3. Housing prices have begun to fall over the past month or so.
   1. Ditto with financial markets; loss of wealthy feeling drags on consumer spending.
4. Mortgage rates have increased significantly in the past three to six months.
5. Prices at the pump, electric, natural gas, have all increased since the start of the Ukraine invasion.
6. Credit, while still in supply, has begun to tighten.
7. No doubt there is more to add, but this should help get the point.

Third, THE UGLY…

1. Inflation has hit its highest levels in 40 years.
2. Inflation’s last read was 9.1%
3. The Federal Reserve has two mandates: Employment and stable inflation.
4. The Federal Reserve chairman, Paul Volcker, raised interest rates aggressively to combat inflation in 1981 to a peak of 20%.2
5. Potential stagflation = 0% growth with high inflation.
6. GDP in the last two quarters has been negative.3
7. To combat inflation, the Federal Reserve is raising rate aggressively .75% at last two meetings. At the same time, GDP is negative.
8. No doubt there is more to add, but this should help get the point.

Since the Great Financial Crisis of 2008/2009, the Federal Reserve has been mostly loose with its monetary policy measures. This has acted as a backstop to the financial markets and kept investors singing its praises.

What we don’t know is whether inflation will react to Federal Reserve actions over the past six months.

Will inflation peak and begin to fall once disruptions from Covid 19 shutdowns and supply-chain bottlenecks begin to ease?

Will the stock market look past some of these issues and see brighter skies ahead? Often the
market defies logic, tends to see past issues, looks to the future rather than the now. We see
this time and again, but will this time be different?

Here is the message for investors. If you can look past all the noise, invest for the future, three to five out, with some of your portfolio, then this may be a good opportunity. Presently, to get back to the highs for the year, the S&P 500 would need to climb approximately 16%.

If you feel it’s a good risk/reward, give us a call. Take a few minutes to complete our online risk profile assessment.

With all that is taking place, we cannot say with any certainty what will happen for the rest of
the year, we don’t have a crystal ball. We can guide investors where we think the probable
sectors or funds of the market could be if one feels inclined to add stock-market exposure.
That’s a truly interesting topic if you’re so inclined to have the discussion.

Thank you for taking the time to read our thoughts…

​Mike Reinhart & Leonard Rhoades

You can access our online risk profile assessment by going to:
www.GlobalWealthSolutionsLLC.com and clicking on the tab entitled, (Risk Assessment Quiz)
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