Author: Minich MacGregor Wealth Management

You may want to get comfortable. This is a long one but a good one.

Rip Van Winkle woke up from a two-year nap and cornered you on the street.  “What’s been happening?” he asks.  “What did I miss?” 

After catching him up on the last two years – COVID, the presidential election, Russia invading Ukraine, Will Smith slapping Chris Rock at the Oscars, etc. – he asks you: “By the way, how are the markets doing?”  (Rip Van Winkle’s an investor, too, after all.) 

Taking a deep breath, you say, “Well, the Dow dropped over 1000 points on Thursday, May 5.”  (Which, as you probably know, it did.¹) 

Rip stares at you in surprise.  “How?” he asks.  “Why?” 

Do you know what you would tell him?  Do you know what your answer would be?     

Well, here’s how we would explain what’s going on in the markets right now.  We would say there are four things that he – and all investors – need to know.  Let’s go through them one by one. 

1. Inflation is the highest it’s been in decades

Between March 2021 and March 2022, inflation in the United States rose 8.5%.²  That’s the fastest 12-month pace since 1981. 

One of the root causes of this rampant surge in prices remains the pandemic.  Thanks to COVID, it became more expensive both to produce and ship a variety of goods – everything from computer chips to furniture.  Before these supply chain problems resolved, though, the lockdowns and social distancing measures used earlier in the pandemic began to loosen.  That caused consumers – buoyed by increased wages and lower borrowing costs, which we’ll get to in a moment – to spend more and more on goods and services.  The simultaneous occurrence of skyrocketing demand and short supply drove prices up almost across the board. 

COVID has also affected inflation in other ways.  For example, wages have gone up in multiple industries due to a shortage in workers. That shortage has given many workers more say as to where, when, and how they work.  To compensate for the increased expense of paying their workers, many companies have raised prices on the goods and services they provide.   

The pandemic has also indirectly driven up home and rental costs.  When COVID broke out, the Federal Reserve made it practically free to borrow money by lowering interest rates to near zero.  This was to encourage people and businesses to spend money rather than save it, thereby buoying the economy.  This indisputably worked, but it brought several side effects.  One such was that making it easier to buy a home led to a rise in demand for homes.  This escalating demand, naturally, led to higher and higher property values.  (The U.S. housing market grew by $6.9 trillion in 2021 alone.⁴)  But we’ve come to a point where home prices rose so high that, for many people, buying a house just wasn’t feasible even with low interest rates.  Instead, they looked to apartments.  The result?  Rental costs are now the highest they’ve been in two decades.      

Other developments haven’t helped inflation.  The war in Ukraine, and the sanctions placed on Russia, have driven prices up further on commodities like oil, gas, precious metals, wheat, and corn.  New lockdowns in China, thanks to another wave of COVID cases, has snarled supply chains even further. 

“Okay,” Rip Van Winkle says, “inflation is bad.  What are people doing about it?”   

2. To tamp down on inflation, the Federal Reserve announced its biggest interest rate increase in 22 years

On May 4, the Federal Reserve announced it would lift interest rates – more specifically, the federal funds rate – by a half-percentage point.⁵  That may not sound like much, but it’s the biggest single rate increase since 2000. 

Essentially, what the Fed is trying to do here is cool down inflation.  As we mentioned, low interest rates prompted people to keep borrowing and spending even during the worst of the pandemic.  With higher interest rates, the idea is to reward saving over spending.  If Americans spend less and demand goes down, companies then have little choice but to lower their prices if they’re to attract new business. 

Lower prices, of course, means lower inflation.   

History shows that raising interest rates is an effective way to tamp down on inflation.  For example, from roughly 1965 through 1982, inflation soared to almost unimaginable levels, peaking at 13.5% in 1980.⁶  (That’s almost double what we’re at today.)  To combat this, then-Fed chairman Paul Volcker initiated a policy of dramatically higher interest rates.  At one point, the federal funds rate rose over 19%!⁷  The policy did its job, with inflation falling back to more “normal” levels by 1983. 

Unfortunately, while using higher interest rates to cool inflation works, there’s a downside.  It’s sort of like performing surgery with a blunt instrument instead of a sharp one.  Why?

Because it often leads to a recession. 

Now, before we go on (we would say to Rip), understand that we are not predicting a recession.  Predictions, as you know, are a fool’s errand.  Nor is it guaranteed that higher interest rates will cause a recession.  But there’s also no use pretending that history doesn’t exist.  And history has several examples of the Fed’s “fight inflation with interest rates” strategy leading to an economic contraction. 

Whether you’re a gymnast or an airline pilot, landings are hard.  But what economists call a “soft landing” is exactly what the Fed is hoping for.  What is a soft landing?  It’s when consumer spending and economic activity slows down enough to lower inflation, but not so much that the economy stops growing and businesses start laying off workers. 

The problem is that there’s little margin of error to work with.  For example, take Paul Volcker’s war against inflation in the early 1980s.  It worked, but at the cost of a “double dip” recession from January-July 1980 and July 1981-November 1982.  (At one point during the latter downturn, unemployment rose as high as 10.8%.⁸)  More recently, the Great Recession can be seen as a kind of “hard landing,” in part due to the Fed’s attempt to cool the US housing market.  But there were many reasons for the Great Recession that had little to do with interest rates. 

On the other hand, the Fed has “stuck” the landing at least once, in 1994-95.  Back then, the Fed doubled interest rates to 6%.⁹  While there were side effects, the country managed to avoid an economic recession. 

Historians and economists debate whether other periods of tightened monetary policy led to hard or soft landings, so we’ll leave that discussion to them.  All our drowsy friend Rip needs to know – besides how to use Zoom – is that the Fed is currently walking a tightrope, with high inflation on one side and high unemployment on the other.  Time will tell whether the central bank can keep its balance.  Much will depend on just how much the Fed raises interest rates, as well as how long global supply chain issues last.  (Most economists expect rates to rise to around 3% by the end of the year.) 

“So,” Rip Van Winkle says, between sips of much-needed coffee, “is that why the markets are going haywire?  Because of a recession?”

3. Investors are trying to digest what this means for stocks – and for the economy.

As you know – but Rip needs to be reminded of, as he’s been asleep – the markets move less on what’s happening now and more on what they expect to happen in the future. 

The volatility we’ve been seeing is proof of this. 

The markets are trying to deal with a hard truth: The era of “free money” is over.  Interest rates not only went to near zero due to the pandemic; they’ve been at historic lows for most of the last twelve years.  Why is that important?  Because super-low interest rates weaken government bond rates.  That leaves investors searching for higher returns with little choice but to plow their money into stocks, which helped propel a historically long bull market that ended only when the pandemic hit.  (But then resumed just a few months later.)  So, higher rates are something the markets will simply have to adjust to. 

It’s important that Rip understands this point about expectation, though.  Expectation is why we don’t overreact to daily market swings, even extreme ones.  Because at any point, expectations could change.  Positive news out of Ukraine or China could do it.  A strong jobs report could do it.  Lower oil prices could do it.  So, as long-term investors, what we’re really looking at right now is not short-term volatility, but long-term developments that will impact our long-term strategy. 

Which leads me to the last point Rip should know (other than “murder hornets” being a thing now).                  

4. We knew this was coming – and we’re prepared for it!

To someone like Rip Van Winkle, waking up to a new world, this all might seem shocking, bewildering.  After all, none of these storylines were around when he fell asleep in early 2020!  But for us, none of these stories are new.  None of it is unexpected.  Which means none of it has taken us by surprise. 

The rest of 2022 is going to be an interesting one.  Headlines – economic, financial, political – will continue to raise eyebrows, stir debate, and even cause angst.  But our long-term strategy accounts for both high inflation and higher interest rates.   

So, the last thing you should know, is to go enjoy the upcoming summer.  After all, you haven’t been asleep these last two years.  Neither have we.  Our eyes have been open the entire time.  

And the last thing we should tell Rip Van Winkle?  Get to work, friend.

You’ve got a lot of memes and videos to catch up on. 

_{1 “Dow plunges 1,000 points,” CNN Business, https://www.cnn.com/2022/05/05/investing/dow-stock-market-news-today/index.html}

_{2 “Inflation Continued to Worsen in March,” The NY Times, https://www.nytimes.com/live/2022/04/12/business/cpi-inflation-report}

_{3 “Prices Are Up a Whopping 8.5%. Here’s What’s More Expensive,” Forbes, https://www.forbes.com/advisor/personal-finance/march-inflation-items-more-expensive/}

_{4 “U.S. Housing Market has Doubled in Value,” Zillow, https://www.zillow.com/research/us-housing-market-total-value-2021-30615/}

_{5 “Powell puts the hammer on price spikes,” Politico, https://www.politico.com/news/2022/05/04/fed-inflation-new-era-economy-00029928}

_{6 “Consumer Price Index, 1913 –”, Federal Reserve Bank of Minneapolis, https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-}

_{7 “Federal Funds Effective Rate,” Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/FEDFUNDS}

_{8 “Unemployment Rate,” Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/graph/?g=BDJS}

_{9 “Fed Seeks Economic Soft Landing,” The Washington Post, https://www.washingtonpost.com/business/fed-seeks-economic-soft-landing-rarely-seen-in-wild-quicktake/2022/03/29/c3502338-af7a-11ec-9dbd-0d4609d44c1c_story.html}

_{10 “America added 428,000 jobs in April,” CNN Business, https://www.cnn.com/2022/05/06/economy/april-jobs-report/index.html}

Markets bucked and sold off again.¹

Should we be worried?

Not necessarily. These things happen pretty regularly, especially when headlines are negative.

In fact, you might recall that we kicked off 2022 with a big drop.²

So, let’s talk about what’s behind the latest wild market ride.

(Scroll to the end if you want to skip right to the reassurance.)

What led to the selloff?

Primarily, economic worries.¹

Worries about new COVID-19 surges.

Worries about Ukraine.

Worries about the U.S. economy.

A report just came out showing the economy shrank by 1.4% in the first three months of 2022, surprising analysts who expected positive growth of 1.0%.³

Though a single quarter of negative growth isn’t a recession, it’s a sign that inflation, the Ukraine conflict, and the pandemic hangover are weighing on the economy.

Realistically, some form of a slowdown was probably inevitable, given the massive economic recovery of 2021.

And, the news isn’t all gloom. 1) This is a preliminary report, so we’ll see revisions later. 2) Economists still believe the economy has plenty of room to grow, particularly given the strength of the job market, so the economy could rebound. 3) Americans are continuing to spend.⁴

The economy is still strong, but it’s showing cracks. We’re watching closely.

You can see a theme: markets are being driven by worry and fear.

Is the selling done?

That’s impossible to say.

Could we see a bigger correction or bear market?

Absolutely. That’s very possible.

Corrections and pullbacks happen very frequently.

Here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance. (You’ve probably seen this chart before.)

Take a look at the red circles to see the market drops each year.

The big takeaway? In 14 of the last 22 years, markets have dropped at least 10%.⁵

We’re dealing with a lot of uncertainty in 2022 and investors are feeling very cautious about the future.

However, that doesn’t mean that we should hit the panic button and exit our strategies.

Knee-jerk reactions to market turbulence can be VERY costly.

We’re here. We’re watching the situation closely.

P.S. A mental snack: A TED talk by psycho-economist Sheena Iyengar on how we make choices

P.P.S. Want to feel more grateful for what you have? Here’s another great TED talk on the topic by Benedictine monk David Steindl-Rast. If you watch it, hit “reply” and let us know what you think!

1 – https://www.cnbc.com/2022/01/23/stock-market-futures-open-to-close-news.html

2 – https://www.cnbc.com/2022/01/23/stock-market-futures-open-to-close-news.html

3 – https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html

4 – https://www.washingtonpost.com/business/2022/04/28/gdp-2022-q1-economy/

5 – https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

You’ll often hear folks like us say that investors or markets “hate uncertainty.”

And that causes market drops and volatility.

Why do we hate uncertainty so much?

Good news!  We’re here with the antidote to fear and uncertainty. We’re going to talk about how we can look past our initial reactions and embrace the power of uncertainty.

Let’s start by answering a basic question: Why do markets, investors, and humans hate uncertainty so much?

Well, for one, humans are wired to prefer predictability and certainty.

And firms, traders, and other market players rely on forecasts and models.

When something big happens that throws the future in doubt (which happens pretty regularly), it makes their predictions and models inaccurate.

For long-term investors who measure success in years and decades, these blips can fade into the background noise.

For short-term traders who need to show success in days and months, it’s a pretty destabilizing experience.

That freaks people out. And often leads to drops, volatility, and other extreme market behaviors.

So, what can we do to find the silver lining hiding inside all the uncertainty in our world? Because it’s not going away.

• One: View it as a reality check. Uncertainty is grounding. It shows us, sometimes painfully, that we don’t know as much as we think we do. So let’s embrace humility and accept how little we really know.
• Two: Be grateful for what we have. What are you truly grateful for right now? Now’s a chance to appreciate and be thankful for what we CAN be certain of. No matter what’s going on in the world, we all have blessings in our lives.
• Three: Embrace resilience. We all have an inner core of steel that’s only visible when something scratches the surface. Uncertainty challenges us to improvise, flex with the times, and build up our inner resources. 

So, deep breath. Yes, times are uncertain, and yes they can be stressful, but we’re stronger than we think.

Was this helpful? Do you have any thoughts or concerns to share?

If you have a question about what we’ve discussed with you or you’d like to speak personally about what’s going on, please email us at yourteam@mmwealth.com.  

Source: https://www.theguardian.com/commentisfree/2016/apr/04/uncertainty-stressful-research-neuroscience

First, a quick note: There’s not much new perspective on current events we can offer. Markets are still locked in a volatile pattern and will probably continue that way for the foreseeable future. We’re watching the data closely.

Today, we have a big-picture question for you if you’re interested.

While absorbing the recent news, we can be forgiven for thinking that the world is going off the rails.

There’s a global pandemic, worrying inflation, atrocities in Ukraine, and “unprecedented” developments everywhere.

A fear arises that it’s all getting worse, somehow.

If we feel that way, we’re not alone. A lot of people feel that way.¹

So, let’s ask the big question: Is the world getting worse? Or is it actually getting better?

Honestly, we’re not sure that question can really be answered.

Why?

We imagine that you’ve heard the statistics of how far the world has come in terms of measurable progress (it’s pretty amazing).

But, though it might be nice to know that global poverty is down or that the rate of people killing people is historically low, that’s not really helpful when you’re getting gouged at the pump, your kid is home sick, and you’re seeing images of ruined lives on the news.

For the first time in human history, we can instantly communicate with folks thousands of miles away and see what they’re doing.

We have access to real-time news from everywhere in the world, and because of how the news is constructed, it’s nearly always the bad stuff that gets our attention.

Most of us spend hours each day consuming media of one kind or another.²

The question we ask each other has changed from “how are things in your neck of the woods” to “have you heard about {crisis of the moment}?”

We’re human. We live our lives one day at a time inside a fairly small bubble. And that bubble is easily influenced by daily hassles, media filters, and our own outlook on the world.

So, what do we do? How do we combat the existential dread and pessimism?

We think this is a serious and important question, by the way.

We need to know how to put things into perspective, for ourselves, for the children and young people who look to us for guidance, and for our loved ones who might need a boost.

A few ideas:

Invest time in relationships with the people we love.

Be selective in the news and media we consume.

Follow our faith if we have one.

Look for beautiful moments and treat them with awe (like that little girl at the fair in the photo above).

Make art, make music, and build something beautiful.

Volunteer, donate, and be the change we want to see.

What do you think? Any advice for keeping it positive?

We’ll close by asking you: How are you doing?

What’s going on in your neck of the woods?

P.S. Why is a practice of positivity so important? Well, it keeps us from making fear-based decisions, for one. We also think it helps us make our little corner of the world better. Johns Hopkins University thinks it might be a big deal for our health.³

¹_{https://clicktime.cloud.postoffice.net/clicktime.php?U=https%3A%2F%2Fwww.pewresearch.org%2Ffact-tank%2F2019%2F03%2F21%2Flooking-ahead-to-2050-americans-are-pessimistic-about-many-aspects-of-life-in-u-s%2F&E=maryellen%40mmwealth.com&X=XID732ADgNSc4402Xd1&T=MMWL&HV=U,E,X,T&H=72a797d2c9abd6b50231db4c900c58d1809c27fb}

²_{https://clicktime.cloud.postoffice.net/clicktime.php?U=https%3A%2F%2Fwww.statista.com%2Ftopics%2F1536%2Fmedia-use%2F&E=maryellen%40mmwealth.com&X=XID732ADgNSc4402Xd1&T=MMWL&HV=U,E,X,T&H=aba58d1e5a68c08de6bd303cfaa7d0b4128e3ae5}

³_{https://clicktime.cloud.postoffice.net/clicktime.php?U=https%3A%2F%2Fwww.hopkinsmedicine.org%2Fhealth%2Fwellness-and-prevention%2Fthe-power-of-positive-thinking&E=maryellen%40mmwealth.com&X=XID732ADgNSc4402Xd1&T=MMWL&HV=U,E,X,T&H=100812a3bed682e295b2aa6e31328a8bece224e9}

Top ‘o the mornin’ to ya! We hope you have donned your green garb, for St. Patrick’s Day is here!

If you’ve skipped the emerald hues, then be prepared to get pinched by Ireland’s legendary mischief maker- the leprechaun!

Ireland has a rich culture and colorful history where fact and fantasy regularly intertwine. From potatoes to shamrocks, corned beef to rolling green hills, there are many things that come to mind when we think of Ireland.

But our favorite? The leprechaun!

In North America, the leprechaun has become something like a mascot of Ireland and is a prevalent feature during St. Patrick’s Day (despite having his own holiday on May 13^th). So, in honor of the holiday, we thought it would be fun to share some trivia about these clever cobblers!

A mischief-maker by nature, the leprechaun likes to frolic through the crowds on March 17^th, pinching those who aren’t in green.

Aside from his love of tomfoolery and shenanigans, the leprechaun is a cobbler by trade. It is said that if you listen close, you can hear the sound of their hammers and tools fast at work deep in the Irish hillside. And, despite commercial depictions, leprechauns come in all colors and sizes, depending on where they hail from. Their height can vary anywhere from 3” to 3’, and while modern day leprechauns wear green, traditionally they wore red. Even now, they vary based on region with green being “trooping fairies,” and red being donned by those found along the western coast. Their outfit styles vary too, from stockings to hats, overcoats to shoes. 

Common Irish lore also says that if, by happenstance, you catch one of these little fairies, they owe you their pot of gold.

But be warned, as part of the Aos Sí – a supernatural race in Celtic mythology – they are clever folk and will do whatever they can to trick you. If you so much as blink before you have your hands on the treasures, you may as well cut your losses! 

Outside their lighthearted jests, leprechauns are quite capricious in nature. Solitary creatures by habit, there are many a legend about their temper and the misfortune that befalls those who cross them. So, be careful if you do decide to go out searching for these wily individuals.

Myth, legend, or simply elusive, it doesn’t really matter. Regardless of whether they are fact or fantasy, the leprechaun has played a huge role in the culture and history that makes Ireland what it is today.

So, remember, wear your green on March 17th to protect yourself from their sight!

On behalf of all of us here at Minich MacGregor Wealth Management, we wish you a Happy St. Patrick’s Day!  As the Irish like to say,

“May the hinges of our friendship never grow rusty.”