June 22, 2022 Commentary

June 22, 2022

When we read headlines about the FOMC being strongly committed to bringing down inflation once inflation has already delivered a knockout punch to the economy, it is not very comforting.

The risks of recession are high and the data will likely show in the future that we are currently in a recession. The question now is how deep will the recession be and what is already priced into equity markets?

The stock channels will likely have guests on that will tell you that this is going to get so bad it will be unbelievable and the losses you have experienced now are nothing compared to what is coming. Are they right or wrong?

The fact is that nobody knows what is going to happen, but we have to watch the numbers as they come in in order to try to decipher the direction of inflation and the the economy in general. With all due respect, the FOMC has been wrong on just about everything related to inflation over the last 18 months, therefore it is possible for inflation to begin to come down as the economy slows. For instance, the 10 year Treasury bond hit 3.48% on June 14th and today it has dropped to 3.15%. Oil hit $123/barrel on June 8th and this morning is priced at $102.47/barrel. Wheat futures were priced at $1,284 on May 17th and this morning are priced at $1,006. Furthermore, the real estate market is showing signs of a slowdown as we have seen large amounts of price decreases in the past week and these are all deflationary trends.  Are these new trends sustainable or just a pause in the trend of higher inflation?

A recession is likely a foregone conclusion at this point, but will it be a shallow deflationary recession or a deep recession with rising prices? The data I am seeing would indicate that it is still too early to tell, but the trends listed above are encouraging for the shallow option. If that is the case, the FOMC will not have to be as aggressive in raising rates which "should" then put a floor under the stock market. The next CPI number comes out in mid-July and waiting until then will feel like an eternity. However, the market moves very quickly and sooner or later the next "Bear Market Rally" will likely end up being the beginning of a new Bull Market. If we knew when that was going to be, this would be so easy.

In the meantime, mentally prepare for the worst and hope for the best. It is important to have your personal balance sheet and emergency fund in order, but it is just as important to keep the faith!

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