Timely Market Insights – Are we on the Brink of Recession?
By Jon Castle
This is a quick update for our readers about what the markets are doing and what our outlook is.
Stocks: The support level at 4400 on the S&P500 failed. We had a solid bounce off that level but the “follow-through” day indicating further institutional buying at that price did not occur. Friday and Monday the market fell sharply, with a very strong bounce yesterday suggesting the market is trying to find its bottom. We are now approaching the previous levels we saw back in late February and mid-March – around 4120 or so on the S&P500. See chart below.
Bonds: 2022 has become the worst year for bonds (so far) in 40 years. The actual prices of bonds – and bond mutual funds – no longer are reflective of the math behind those bonds.
In other words – bond prices are usually calculated by discounting the cash flows of all the future interest payments a bond owner is expected to receive.
For example, if you own a bond that is expected to pay off at a specific date – and pays interest along the way – then you as the owner basically know how much money you will receive from that bond. If you add up all those payments – discount it based upon expected interest rates – you can create a realistic value of those future cash payments – TODAY. However, the pricing we are seeing is now disconnected from that math. Bond prices are continuing to fall DESPITE the bonds actually being worth more than their current price in the market.
Economy: I suspect we are on the brink of a global recession – but one which the US may avoid IF the Fed doesn’t overplay its hand trying to crush inflation and IF inflation itself doesn’t crush consumer spending.
The balancing act we are trying to play is one of the most difficult I’ve seen in my nearly 30-year career. Stocks are currently where they are – we can’t roll back time and sell at the top of the market; we must play the hand we have currently. The current stock market price suggests we could be at the bottom of this correction, and going forward, stocks could do fine. Stocks typically bounce the highest when pessimism is the highest as well; I have seen people sell at the exact HOUR of the bottom of a correction because they listened to bad news on TV or the internet instead of sticking to their investment policy.
That being said – nothing says the market can’t drop LOWER than it is currently – maybe even a precursor to recession. USUALLY, a recession is preceded by a really good market for a year or more. This phenomenon is known as a “blow-off top.” But pessimism caused by a pandemic, inflation, and war which directly affect our own energy supplies and global trade may prevent this from happening.
Currently the odds of the US being in a recession within the next 3-4 months – which is about the farthest “actionable” timeframe for most investors – is less than 2%, based on the data from algorithms we monitor. Getting out of the market or executing Recession Protocols at this time doesn’t make sense. However, longer-term projections of a likely recession in 2023 or 2024 are much higher - probably in the 30 - 40% range - so making changes in order to become more defensive does make sense – changes we are slowly making while trying not to cause large tax ramifications – or to take away the opportunity to get some payback once the market finally does solidify its bottom and recover. Usually, a market recovery occurs very quickly; for example, the 20% correction of December 2018 had fully recovered by April 2019. Usually - but, as in all things... we are still dealing with "odds."
Until further developments indicate otherwise, it is prudent to stay patient. Sometimes "doldrums" last a year and a half or more as the economy and investors sort out changes.
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