There are many myths about why bulls and bears are used to denote up and down markets. One is that bulls use their horns to toss their antagonists upwards, while bears dispatch enemies by clawing downward. In any case, a bull market is up, and a bear market is down.
You may remember that last June (2022), the Standard and Poor (S&P) 500 Index and the Dow Jones Industrial Average (DJIA) slipped into “bear territory.” Technically, a bear market is reached when the index in question is at least 20% below its last highest point. The high point was December 2021, which saw a post-Pandemic Santa Claus rally like few others. The convergence of stimulus money from two administrations and the pent-up demand of COVID shut-ins drove up spending. Corporations raised prices, but people kept spending.
The downward slope began in February 2022 with Vladimir Putin’s invasion of Ukraine. Europe worried over the loss of Russian oil and gas and Africa and India worried about the loss of Ukrainian grain and sunflower oil.
The downward movement continued in March when the Federal Open Market Committee (the Fed) began increasing interest rates. (More on interest rates in a moment.) This dismal slide continued until early October 2022 and then it stopped.
This month we hit the 20% mark over the low point reached in October, 2022, so we are officially in a Bull (Up) Market.
The Bull may be back, but he is not fully recovered.
In fact, he is still feeling rather ill, and the recovery will take time. In the meantime, his temperature fluctuates up and down. The important point is that the trend line has reversed, both for stocks and the world outlook for the future.
Pundits expected Ukraine to fold within the first week of Russian bombardment. They did not. Putin sought to change the regime of Ukraine to one of his puppets, but the change in regime may eventually be in his own country.
Closer to home, Congress narrowly averted an economic catastrophe by passing a bill to increase the debt ceiling.
Speaker McCarthy seemed to believe the tiny concessions to discretionary spending were worth taking the nation’s creditworthiness to the brink. He seemed most interested in keeping the IRS’s enforcement team as weak as possible. That may come to haunt him in the future, as debts are paid with revenue.
Meanwhile, June unemployment numbers were the lowest ever at 3.6%. Household income also increased, which would seem to be good news unless you are a stock trader on Wall Street.
Point of View is Everything
While Main Street sees higher wages and low unemployment as a good thing, Wall Street sees this as a further inflationary trend and predicts the Fed will continue to raise interest rates. (We need to develop better tools to curb inflation, but right now interest rate increases are the Fed’s only tool.)
Wall Street has several concerns about interest rate increases. Soaring treasury rates makes existing bonds less desirable, because nobody wants to buy last month’s bond issued with a lower interest rate when they can buy next month’s bond with a better interest rate. This means existing bonds get sold at a discount. Earlier this year, the failure of Silicon Valley Bank and Signature Bank were linked to reserves held in devalued Treasury securities that could not cover the withdrawal demands of bank customers.
But Wall Street’s main concern with interest rates is that many entities need to borrow to keep the economy moving. Whether it is a company borrowing money to buy parts to produce manufactured goods, a farmer borrowing money for fertilizer and seeds, or a young couple borrowing to buy their first house, borrowing and repayment keep the gears of our economy meshing. When the cost of borrowing becomes onerous, those economic gears stop turning.
A Special Note on interest rates for Atrium Pension Plan Participants
The Atrium Plan allows employees to take the Net Present Value of a stream of income promised at retirement. The higher the Treasury rate, the lower the lump sum needs to be to produce the promised benefit. Treasury rates have increased again this year and are likely to increase more before the end of the year. If you are of retirement age, please call me so we can discuss how this will impact your lump sum. You may want to retire sooner rather than later.
Will there be a recession?
No one really knows. But more and more economists are beginning to believe in a “soft landing”– a scenario where prices fall but unemployment does not spike to highs that cause a foreclosure crisis or other cataclysm.
A recession is measured by two consecutive quarters of negative gross domestic product (GDP). Economists have been predicting a recession since the Fed began the interest rate increases in March of last year. Yet the economy has remained stubbornly resilient and employment–devasted during the Pandemic and the subsequent Great Resignation–has been growing back steadily.
So how do we survive inflation?
Please talk to me at (704) 502-6649 or firstname.lastname@example.org. I cannot answer questions via text, so please feel free to call. I am of the phone generation, so I will not consider a phone call as a rude interruption. I love to talk with clients!
If you are going to need a large outlay from your portfolio, let’s plan that over time, if we can.
If you are planning a job change, discuss it with me before you make the move. Let’s make sure the employee benefits are equivalent or better at the new job. Let’s consider your whole financial picture, and what is right for you and your family.
In the meantime, we will keep adjusting portfolios for the prevailing economic conditions. It is not just how much we make in the upticks, but how much we keep in the downticks that will determine our ultimate success.
Just remember to call me if you need me. I am here for you.
Phone: (704) 502-6649