Recession, Stagflation, and Falling Stock Prices
In my opinion:
We are likely in a recession, and
Investors will have to navigate a stagflationary environment.
As I pointed out in our March 6th, 2022 blog post, Coming Recession?, the U.S. economy appeared to be moving towards recession. GDP fell in Q1, The Atlanta Federal Reserve recently updated their estimate for GDP growth in Q2, estimating -1.20%.
The accepted definition of a recession is ‘two quarters of negative GDP growth in a row’. It appears that we are likely already in a recession. The official GDP announcement will be released later this month.
The second quarter GDP estimate is below:
Liz Ann Sonders, Chief US Investment Strategist for Charles Schwab, commented “There’s no spinning this, other than the Fed has to get more aggressive near term and crush demand. that cements a recession now. I think a recession is an inevitability.” (CNBC Dow slides 200 points, stocks dip as inflation hits highest level since 1981 – July 12th, 2022)
Stagflation can be as a period of inflation combined with a decline in the gross domestic product (GDP). A stagflationary environment is generally bad for equity prices. Some investors have observed that stock markets perform poorly during stagflation, as they did during the 1970s.
Many professionals have been pointing out that stagflation could be a future reality, earlier this year.
Recommendation for investors – ‘Do not fight the Fed’.
The Federal Reserve is reversing its’ monetary policy, instead of printing money and pushing liquidity into the economy the Fed is reversing course and taking liquidity out of the economy. The ‘Fed put’, where the Fed injects liquidity into the financial system when the stock market falls, is not an option now because adding stimulus into the economy would add fuel to the inflation fire.
The Fed has stated that it is focused on getting inflation under control. Historically the Fed rate increase cycle has ended when the Fed Funds rate is above inflation. The year over year inflation rate came in at +9.1% on July 13th, 2022. The Fed could have to raise interest rates much higher than investors are anticipating, in order to get inflation under control.
CNBC observes that inflation reaccelerated in June.
Caution is warranted. Our Highcroft Wealth Shield discipline has helped clients preserve capital in 2022, on January 21st, 2022 I posted a blog noting that the Wealth Shield discipline shifted our investor assets out of stocks and into bonds and cash. RBC Wealth Management pointed out that stocks tend to lose 1/3 of their value during a recession (CNBC 06/13/20220.
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DEFINITIONS
Atlanta Fed GDPNow – The Atlanta Fed GDPNow estimate is a model-based projection. It is not an official forecast, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow, the estimate is based solely on the mathematical results of the model. The model does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. The model does not anticipate future economic reports.
Blue Chip Economic Indicators – Utilized by the Atlanta Fed GDPNow. Each month since 1976, Blue Chip Economic Indicators has polled America's top business economists, collecting their forecasts of U.S. economic growth, inflation, interest rates, and a host of other critical indicators of future business activity. Our 30+ year track record of providing corporate and government decision-makers with our survey results has made Blue Chip Economic Indicators synonymous with the latest in expert opinion on the future performance of the American economy. The editor of the Blue Chip Economic Indicators is Joseph Aguinaldo.
Blue Chip Financial Forecasts – Utilized by the Atlanta Fed GDPNow. The forecast provides the latest in prevailing opinion about the future direction and level of U.S. interest rates. Survey participants such as Bank of America, Goldman Sachs & Co., Swiss Re, Loomis, Sayles & Company, and J.P. MorganChase, provide forecasts for each of the next six quarters for the following variables: Federal Funds Rate, Prime Rate, LIBOR, 3-month, Commercial Paper, 1-month, Treasury Bills, 3-month, 6-month, 1-year, Treasury Notes, 2-year, 5-year, 10-year, Average Long-term Treasury Yield, Corporate Aaa Bond, Corporate Baa Bond, State & Local Bond, Home Mortgage Rate, Fed's Major Currency Index, Real GDP, GDP Chained Price Index, Consumer Price Index.
Blue Chip Survey – Utilized by the Atlanta Fed GDPNow. The Blue Chip Survey is comprised of the top 10 average forecasts and the bottom 10 average forecasts.
Federal Funds Rate - Set by the Federal Open Market Committee (FOMC), this is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. The FOMC, which is the policymaking body of the Federal Reserve System, meets eight times a year to set the target federal funds rate, which is part of its monetary policy. The level of the rate can be used to help increase or slow economic growth.
FRED Gross Domestic Product - Gross domestic product (GDP), the featured measure of U.S. output, is the market value of the goods and services produced by labor and property located in the United States.
Highcroft Wealth Shield –The primary objective of Highcroft Investments Advisor’s Wealth Shield program is capital preservation. Using a rules-based discipline it exits investments that have broken into a bear trend, shifting the money into investments that are in a bull trend or into a defensive position (such as cash and U.S. Government bonds).
Wealth Shield is a strategy for time periods where investments or markets generate downward momentum. The discipline seeks to limit losses or lock in gains, helping to prevent further declines. During certain periods client accounts can be invested 100% in cash.
For investors who are in the retirement red zone, capital preservation can be their number one priority – Wealth Shield seeks to address their goals by managing investments during periods of significant losses.
Highcroft Wealth Shield Availability - Highcroft Wealth Shield is only available in Strategic Asset Management (SAM) accounts managed, on a full discretion basis, by Gerald Asplund with Highcroft Investment Advisors. The program is not applied to other SAM accounts or to any brokerage or 401k accounts. The strategy is not suitable for all investors and this is not a recommendation that all investors adopt this strategy.
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