Like a Band-Aid, Right Off
Telemus Weekly Market Review June 13th - June 17th, 2022
This past week all eyes were on the Federal Reserve. While the outcome wasn’t surprising, the market continued its recent trend of erratic trading around Federal Reserve Open Market committee meetings. Stocks rallied on Wednesday afternoon following the Fed’s announcement that they were increasing interest rates (the federal funds rate) by three-quarters of a percent but sold off significantly on Wednesday. For the week the S&P 500 dropped -5.8%. Bond yields seemed to level out having risen considerably going into the meeting. The bond market, as measured by the Bloomberg Barclay’s U.S. Aggregate index, lost -0.9%.
While the market seems fixated on whether the Fed will raise interests rate by a half or three-quarters of a percent, what really matters for long-term investors is the level the fed funds rate sits at by the end 2022 and more importantly 2023 and beyond. This past week’s decision is just one step along that path. Given the volatility that transpired around what we see as a fairly inconsequential single datapoint, we believe it’s important to ground ourselves and not get caught up in the noise associated with short-termism.
In recent weeks market apprehensions have begun to spread beyond interest rates toward rising concerns that the U.S. economy may be headed into a recession. Candidly, we think this is a legitimate fear. The textbook definition of a recession is two consecutive quarters of negative Gross Domestic Product (GDP). In the first quarter of 2022, the U.S. GDP fell by -1.2%. The decrease in total economic activity was fueled by one-time items like a reduction in inventories and a larger trade deficit. The Atlanta Federal Reserve has its own GDP tracking tool, GDP Now, which seeks to provide a real time estimate of the current quarter’s GDP. As of this week, the Atlanta Fed’s GDP Now estimates Q2 GDP of 0.0%. Thus, we may be embarking on a period of two negatives quarters of GDP growth and in fact may already be in a recession.
The connotation of a recession is negative, but it’s important to put context around current economic conditions and a potential recession. For starters, the current economic cycle is highly unusual. We have been in a climate where we’ve had excess demand driven by high rates of saving during the pandemic and excess fiscal and monetary stimulus. As the economy works past this excess demand and returns to normalized conditions its naturally going to slow the economy. Second, if a recession were to occur, we see a greater likelihood of a shallow downturn given current economic conditions such as low inventory levels, excess employment (more job openings than unemployed workers), record low consumer debt service costs, high personal savings balances, and high demand for infrastructure spending. Finally, markets are forward looking and anticipate future conditions. As such, we often see stock prices fall in advance of a recession and at some point begin to rebound during the recessionary period as the market anticipates a recovery. Thus, it seems to us that some of the downside experienced in recent weeks is already embedding a greater likelihood of a recession.
In recent commentaries we’ve brought up the notion of short-term pain and long-term gain. When we consider what is transpiring in the economy, as well as stock and bond markets, it harkens back to a line from the Seinfeld show, ‘Just do it like a Band-Aid. One motion. Right off!’. It seems like that is what may be going on as we are experiencing more short-term pain today, but hopefully setting markets up for long-term gains in subsequent years. We have greater excitement today with the bond market, in aggregate, yielding over 4%. Among stocks, with the S&P 500 down over 20% in 2021, technically meeting the definition of a bear market, the valuation is much more compelling than it was headed into the year. Moreover, as stocks have sold off, they have tended to sell off indiscriminately as a group. As time goes on, we would expect opportunities for active stock pickers to add value from the purchase of stocks that were disproportionately punished during this year’s downdraft. While short-term pain is not enjoyable to go through, we know markets will have ups and downs, and we are more enthusiastic about the prognosis ahead as we go through this period where we rip off the Band-Aid.
All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value.
An index is not a security in which an investment can be made, as they are unmanaged vehicles that serve as market indicators only and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. The S&P 500 index includes 500 leading companies in the US and is widely regarded as the best single gauge of large-cap US equities. The Bloomberg Barclays US Aggregate Bond is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Advisory services are only offered to clients or prospective clients where Telemus and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Telemus unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.
Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.