It’s A Small World After All
There is no question that globalization has driven lower costs for consumers over the last two decades as production moved to the most competitive parts of the world. Is that going to change? We think so, and the result will be higher costs to the American consumer.
Wherever we look, here are supply and demand issues that must be resolved. Additionally, at this point, the Federal Reserve is restrained given its mandate to cool inflation and bring the economy to a sustainable level.
The stock market has been suffering from a “tech wreck”, resulting largely from the combination of rising interest rates and the fear of lower earnings. This is a function of earnings multiples becoming compressed when interest rates rise resulting in a lower stock prices.
Ultimately, innovation will drive the future, therefore, do not give up on technology. It has always been a volatile sector, but a place for making money. Interestingly enough executives are buying their own stock in large measure. This is a positive sign for the market on a longer-term basis.
This year, the fixed income markets have faced large declines as well with the “conservative” allocation of 60% stocks and 40% bonds– down approximately 15%. That means that the population of retirees or those close to retirement, have been hit hard by this sell-off.
The fear factor could cause a recession as lower- and middle-class citizens begin to rein in spending. Higher earners are still spending – let us see if the drop in equity prices affects these consumers.
As we move into the summer, significantly higher oil prices may affect travel, and this may not be the spending engine that many were expecting, and “staycations” may be more relevant.
Our friend, economist Ed Yardeni, points out that when it became apparent that the Federal Reserve would no longer step in to bail out the economy, the stock market began to swoon. Yardeni has revised his opinion that the probability of a recession is now 40% up from 30%. Given this economic backdrop, we have made moves to shift our portfolio emphasis to more total return objectives and increased cash in a number of portfolios.
Political campaigns will heat up in the summer and give thought to the November elections. Look for increased polarization and conflict between the left and right.
Common sense is not so common. Keeping an eye on grocery prices, the parking lot at the retail stores and the lines at McDonald’s may be a good indicator of whether the Federal Reserve policy is effective.
Ernest Hemingway said “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”
Watching the economy over this summer will be interesting and potentially give way to some good opportunities. We will be watching closely and waiting patiently.
Wear sunscreen.
As always,
Seymour W. Zises
