In the July 2022 issue of The Seven Signs of a Changing Economy™ (Read it Here) I detailed how we could be clunking along the bottom of this bear market (negative) cycle. In our client accounts, we continue to have heavy cash allocations, as much as 50% to 75%, depending on the client. The reason for this:
- We still have inflation slowly rolling down, but it could take a few years to find the “new normal”.
- The Federal Reserve has reported that interest rates are going to increase again in July and August. This is not great for market valuations.
- In addition, the Federal Reserve continues with their “quantitative tightening”, which simply means they are taking out $95 billion per month from the money supply. The capital markets need liquidity, so this is a negative.
- Currently, the two-year U.S. Treasury Bond pays more than the ten-year U.S. Treasury Bond. This is referred to as an “inverted yield curve” and usually precedes a recession by 6 to 18 months. Technically, a recession is considered two months of contracting economy. We know from the Bureau of Economic Analysis that the economy contracted in the first quarter of 2022, and per the Atlanta GDPNOW, it also contracted through the second quarter of 2022 i.e., two consecutive quarters technically qualifies as a recession.
Depending on how long and how deep that recession is will also determine the impact on the earnings of Corporate America. All of these relate to lower earnings, and you could therefore expect lower valuations of Corporate America.
- The calendar is not favorable as we look forward. September is the second worst performing month of the 12 and October is the worst performing of the 12. Both of those precede what is likely to be a bitter, mean and divisive midterm election mudslinging event heading into the November 8th elections.
The good news is the calendar does turn positive on November 1st, as that starts the best performing six-month period each year.
We are keeping our eye on this current turnaround in valuations. An uptrend for two sectors that lead the market down should turn the trend up. The two sectors are Small-Cap Growth and Technology.
I’m interested in your thoughts, comments and observations. Feel welcome to call, email or stop by the office and say Hi.
James O. Lunney, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss.