The last decade-and-change has been an incredible run-up of the equities markets. From the bottom of the global financial crisis in 2009 to the end of 2021, we saw the longest bull run that the stock markets have ever seen. Even through the pandemic, which caused but a momentary blip to the markets, equities continued to rocket to new highs.
But it’s evident that some part of that extraordinary accretion in equity values was due to excessive monetary stimulation by the Fed. And to that extent, we are having to give some of that gain back, as the Fed moves to bring the resultant inflation under control. We should, I believe, want them to do this, even if it means the economy slows. In the long run, the cure (possible recession) is not more painful than the disease (inflation).
The fed is slated to pull out of the bond markets in June, and we’ve got that date circled on our calendars. The fed creates liquidity in the bond market as a modality of stimulating the economy.
They were still buying billions in bonds while house prices skyrocketed, and the markets hit newer highs. Growth has slowed significant, and the fed insisted on raising rates. This caused part of the destabilization, so I don’t believe that the markets are over-reacting. In fact, this is nearly a textbook bear. It’s orderly, and the markets are trying to find footing after having been whiplashed in several directions.
In one way, this is the poster child of what a normal correction looks like. This decline is mathematical in nature, valuations are stabilizing for many transparent reasons, and people still have jobs. This is end-of-cycle behavior.
This isn’t a pandemic where we have no clue what can happen, nor are hundred-year-old banks collapsing. Unless the federal reserve pushes us into a deep and protracted recession, which is never off the table, right now this is merely equivalent to waking up late on a rainy Monday morning, and realizing you’ve run out of coffee as you stumble your way to work.
Here’s what the normalizing looks like on a practical basis: late last year, Zoom, a video conferencing software, was bigger than Exxon in terms of market capitalization. In the blink of an eye, Exxon has returned to 13X bigger than Zoom. Investments have a calculated valuation with that price being further adjusted by its sector, market consensus, how institutional investors feel it, and myriad other considerations.
Many technology names had rallied so far beyond acceptable levels and this caused biased optimism among the tech indices, which drags many other positively correlated indices with them. Remember, many index funds include the same names and have overlap. Big swings in tech moved swaths of the market. We’re finally beginning to see a needed reset of valuations.
If there is a recession on the loom, then we have more to fall because trading multiples still need to come down from where they are right now, and corporate earnings would follow. The most important thing we can do right now is to focus on the fed. We’ve not seen the third act of the play, which is the fed backing out of the fixed income market this summer.
They do not care about stock market prices; the stock markets are just one component of the overall economy. But the fact is that they made a mistake with their policy and were contributors to the high inflation. Their job is to maintain price stability, and so now they take on the role as whip.
You’ve heard us say that market price corrections are like cliff-jumps, while market price accretion is like scaling a mountain. It’s sluggish, sometimes you stop, and sometimes there are dips before angling upward again.
Our team is watching over the plans we have for each of you and making changes where we see necessary. Throughout the year, there are many different topics in which we work through together, and despite a currently less favorable market, you are still building towards a successful future.
Remember that the greatest sign of success is your ability to live your lives uninterrupted by what happens in the markets and economy. That’s what we’re building toward for each of you every day.
So be encouraged by the long-term successful progress and remember that we’ll be with you through all of it. Be in touch with us if you have thoughts, angst, or you just want to chat.