What a crazy first six months of the year in markets. Stocks and bonds are materially lower, interest rates have been on the rise, volatility is very high, inflation fears, recession talk…all while the job market is still humming along and airport parking lots are completely full! It’s a very confusing environment to say the least and that’s by far the question we’ve fielded the most: Can you square all this for me – what’s really going on?
In our summer note I’ll dive a little deeper, but the “summer vacation” 35,000ft. version amounts to this (and excuse my lack of nuance here):
Two years ago, Covid changed spending patterns in a huge way. Everyone bought a laptop, a new grill, had 15 weekly Amazon orders, what have you. All these durable goods and the supply chains that make them experienced a boom like they’ve never seen. No, that’s not the breaking news. However – it lasted longer than anyone thought, mainly because Covid has as well. Just in January Omicron disrupted the economy in a big way – and that was only 5 months ago! Well, the longer something continues, the more people (investors, executives, etc.) get used to how things are, i.e. thinking higher goods spending is normal, instead of a ‘prolonged abnormal’. Year over year data points start to get distorted, forward inventories get shifted, and so on. All of this abnormality caused a surge in goods inflation, accentuated by the Ukraine War (gas+food prices).
Fast forward to today, and people aren’t buying laptops anymore! Instead, they are traveling, eating, and getting out of the house. Therefore, we have a day where Delta says May bookings were the highest ever recorded, while Best Buy says computer sales were in the dumps. A big retailer like Target commented their casual apparel sales are down big, but they also completely sold out of suitcases. Let’s be clear, this shift isn’t normal – its still a part of the Covid aftershock – but it’s really throwing many general investors for a loop because it’s hard to square up when looking through a shorter time frame. This spend shift influences inflation too. Last May used car prices were up north of 30%. This May airline tickets were. The uncomfortable part is that these shifts don’t unwind overnight and become normal again – so inflation won’t either! It will take some time but the Federal Reserve is feeling the heat to speed up the process (enter interest rate hikes).
Looking at the big picture, the consumer and the economy still have a good foundation. We see encouraging signs that inflation is coming down. And historically, Fed-engineered growth slowdowns are short and shallow times of pause. It’s a whirlwind of crosscurrents and that’s what the markets are digesting right now, but the longer-term outlook remains solid.
Our 3 rules of investing are getting put to good use this year: 1) Most powerful rule: dollar cost average to aid compounding returns, 2) Hardest rule: stay invested, and 3) Best rule: stay on plan, daily fluctuations aren’t important. Enjoy!
