Louis Cannataro, Wealth Management and Business Advisor, Cannataro Family Capital Partners.
As “Fed AIR” comes in for a landing, recall that we reviewed the flight plan in my last article. Now let’s jump into the cockpit to hear the flight crew’s chatter, view the instrument panel and look out the window ourselves:
Interest rates increased to “normal” ranges: Check.
Inflation cooled but is still on the high side: Check.
Employment is high but cooling: Check.
Control and crew looking to land, paying attention to headwinds (recession, unemployment, inflation) and cross-currents (election, geopolitical disruption, war and any other potential “black swans”) coming our way: Check.
Landing gear down: Check.
Election Barometer
Always cast your vote in an election, not in your portfolio. No one president has ever moved this huge vessel, the U.S. economy, on their own. Historically, returns based on blue or red administrations and most- versus least-popular elected officials have never been a good indicator of market performance.
Political outcomes force markets to adapt to any immediate changes and then refocus on the long term. The size and breadth of the economy and where we are in the business cycle always resurface as the ultimate driving forces of the market. There will be much market volatility and, as always, “black swans” (unexpected surprises) along the way. In any volatile market there will be periods of sell-offs. In my view, sell-offs will be short-term reactions to invoked or changed policies. Once the market digests the possible changes and clears the uncertainty, then we will propel forward once again. When it comes to your investments, try not to let political beliefs become the major driving force of your investment decisions. Good long-term performance is often thwarted by giving into one’s short-term emotions, which can derail your long-term investment strategy. This is even more true when political beliefs clash with long-term investment goals.
The Business Cycle Indicator
This is the most important economic indicator for the markets! Where a president takes office, it is the “business cycle” that presents as the indicator for potential recession and returns. We are in the late stage of a business cycle in which unemployment and inflation are low, and the market is up but now showing volatility.
Recession Return Compass
A significant recession the likes of which we have not had since 2008 (though in 2020 we had a pandemic recession and a bear market in 2022) is almost inevitable. It is part of the normal business cycle, but things have not been normal since 2008. The gauge, unfortunately, never knows if a recession has started already or when it will start.
I do think that if a recession occurs, it will not be deep or long, but the length and depth of a recession are also never good indicators of how the economy expands following the recession. This is an important point!
Historically, the monies you have invested for the longer haul and that you stay invested in can weather a recession. In the 2007-2009 and 1990-1991 recessions, lasting 18 months and 8 months, respectively, both saw 120 months or more of expansion and growth.
Inflation Coordinator
Inflation is elevated but cooling down. Historically, during times of inflation, stock prices drop—but at the same time, the 10 best- and 10 worst-performing stock-market years had the same inflation rates.
Just as important, the focus should not be on where inflation currently is at any given moment but where it is heading. If inflation is headed toward cooling off, historically, markets have performed well during times of cool inflation.
Geopolitical And Macro-Events Gauge
Historically, what has been thrown our way is always different, but the market outcome has consistently been the same. On average, after market corrections (considered a 10% drop in major stock indices from their market high), positive returns occurred relatively soon after, with an average of just a few months to be back to even in a non-recession correction and a few years in a recession correction.
As we now return to our seats and buckle up for this landing, many of us are still dizzy just from the 2008 collapse and the 2020 pandemic—never mind the run-up to the election and now the increased threat of war. We may long for the days without the dramatic intrusion of cell phones, massive flows of misinformation and uneducated, unknowledgeable opinions. However, these are the times we live in now. I know if we stay focused, eventually we will gain back more control of this journey we call life.
In the meantime, I am confident our current flight will land safely. It may not be a pretty one where everyone claps (do they even do that anymore?), but we have always planned for turbulence and these sometimes unavoidable “hard landings.”
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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