Bad to Worse
It seems that way at the moment, doesn’t it?
There’s a war in Europe.
Each headline appears worse than the one before, and as this trend intensifies, bad on bad, fear on fear, the adaptive forces of humanity take charge – let’s make lemonade.
Elon is buying Twitter. Ha….
Mr. Buffett’s Berkshire Hathaway Inc. bought insurer Alleghany Corp. for $11.6 billion – Berkshire’s biggest acquisition in six years.
Families are concerned about inflation and the impact higher prices have on their ability to maintain lifestyles. Equity markets, we believe, have the most recent headlines baked into the mix. We believe the most recent Personal Consumption Expenditure (PCE) data will most likely represent the inflationary peak: we expect inflation to begin subsiding. But not in the immediate future: Personal Consumer Spending (PCE), the preferred index of the Federal Reserve, just posted an all-time high of 6.6%, according to The Bureau Of Economic Analysis. Higher than last quarter. Highest in 40 years, give or take.
Travel with me; get aboard my time machine. Let’s go back to the late ‘70s and early ’80s. Remember “Stagflation” = high inflation & slowing growth. Our group’s last newsletter, published in January, hinted at this phenomenon:
“I just heard the word “Slowflation” and believe it describes the period we are entering. Think of it as Stagflation light: increasing prices and interest rates, a slowing economy, kind of like a deflating balloon. Not a pop, not exhaustion, just tired, needing a nap. We believe some high-flying valuations exhibited across many asset types and classes will most likely begin to reset.
Piling on. Business earnings estimates are increasing but at a reduced rate. Based on the latest quarterly data from Standards and Poors Indices, earnings growth projections have slowed to around 9.5% from slightly above 12%. In our view, consumer spending for durable goods declined due to increased costs for just about everything. Low and behold, our economy posted negative growth – Gross Domestic Product decreased by 1.4% (BEA) – The economists at the Federal Reserve Bank were surprised, again.
The impact of higher prices for labor, materials, borrowing costs, and energy combined with the friction caused by gnarly supply chains and renewed government regulation is, in our view and calculations, effectively narrowing the valuation spread of the equity market. The slowing trend we are observing in revenues and earnings in the S&P data is similar to the latest data from the Institute of Supply Management – showing expansion, but at a muted pace coincident with lower consumer spending and negative GDP results.
In the next six months, what is the likelihood that equity returns will post new highs?
Bad to Worse – equity price value dislocations should abound; we’ll work to invest wisely and make lemonade.
Carlos Dominguez – CERTIFIED FINANCIAL PLANNER™, Portfolio Manager, RJFS
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