Recession Watch and The Federal Reserve

November 17, 2022    |    Sage Capone

Investing Viewpoints

  • The Federal Reserve has Full Employment but they’re trying to Solve Inflation
  • Strong Labor Market has allowed Federal Reserve to be Hawkish
  • Staying Invested through the Ups and Downs of the Market is Key

Market Perspective

The stock market recession rhetoric has been bad with stocks, bonds and the financial markets have had poor returns. The housing market has also been affected with the high mortgage rates slowing down the housing market. As a financial advisor with Brookstone Capital Management, we anticipate the recession is going to be talked about for about a 12–18-month period. We are going to be in this period of anticipating a recession and continuing to talk about it for some time. As conditions and the numbers really aren’t saying that we’re going down into a recession just yet. The interest rates rise from the Federal Reserve (Fed) is giving us a lot longer lead time before it hits the economy. In other words, if you were to say that 2022 was the year that financial markets got stung by raising interest rates and tightening monetary policy. Then, that didn’t’ really follow through to the underlying economy. This recession may get kicked out into 3rd and 4th quarter of 2023.

The latest Gross Domestic Product (GDP) Numbers show the US Economy Grew .6% in the 3rd quarter. That is a 2.6% annual rebound. However, this is not enough to ease worries of a recession. These numbers reiterate the case that it’s going to take a little while longer till a recession hits the marketplace. The reasons supporting this thesis is the strong employment rate picture.

When you have high employment levels. That means there is a lot of people working that can manage through and help the economy through different challenges. So, one of the keys of looking at the labor market is not showing up at all currently as it’s been very robust at these levels. I think one of the main reasons why it hasn’t turned into a recession and may not for some time are these strong labor numbers have allowed the Fed to be Hawkish.

The unemployment numbers at 3.5% are quite strong and relatively low. Nobody likes rising prices or rising inflations level with groceries or the price at the gas pump. But if you’re employed, it provides a portion of the workforce to bite through that and be able to manage through inflation.

The Fed is also worried about is this low level of unemployment rate can cause wage inflation which they think is not a good thing. Thus, wage inflation is something they’re trying to get control of as well, so it doesn’t perpetuate continued inflation in other pockets of the economy. To do that, they would have to get the unemployment rate up to closer to 5% or more.

This makes you question, what is the mandate of the Fed? Number one, they’re looking for maximum employment, and number two, a moderate level of prices or moderate inflation. The Fed is battling both of those dual mandates. We have full employment but they’re trying to solve the inflation problem. The Fed must strategize back and forth between these two mandates. Whether you think that’s the right policy or not. That’s what they’re trying to accomplish.

Source: Visual Capitalist

The Fed has been very aggressive with raising rates which is closer to that 3.75% to 4% range now. We do expect them to raise again in December but potentially downshift and reduce rate increases in 2023. The Fed may move in that direction because they’ve moved so quick that there is a delay in the reaction in the function of Monetary Policy Actions into the overall economy. These actions could ultimately lead to a recession, but by then the financial markets will hopefully be on the repair.

The best months and best days are right near the worst day or worse months. The stock market could rally very sharply. Zoom out and focus on the financial plan As I’ve stated previously, when the market turns it will take away several months of losses in a very short amount of time. At times you could be seeing these losses and feeling bad, then all of sudden within a month you’re back very close to where you would have been six months ago if you were in a six-month decline.

A good point to remember is that in 2009, the market was down about 20% on March 9th before it bottomed by the end of the 2nd Quarter, June 30th it was flat on the year. Meaning it made it all the way back. In other words, sometimes those big drawdowns aren’t what you think if you’re continuing to invest. It’s no fun going through a decline, but it is a part of the process. When it turns, it’s done it time and time again even with Covid in April after a very terrible March the market rebounded and then it kept going throughout the rest of the year.

Source: Putnam Investments

As with my previous post, the graph above illustrates a $10,000 investment over a 15-year period when you miss the 10 best days you can see what happens. The graph shows the big difference and the discipline of investing in a risk appropriate portfolio. Staying invested through the ups and downs of the market is the key when sticking through a financial plan. The market will have good days and bad days, but we can’t time the market on when it may rally. As you take this past October, there was not a particular catalyst that influenced a rally of the financial markets. Nevertheless, it did, and part of that is because it was oversold and there could be technical reasons for the market to rally. But if you missed that month your return is a lot different. 

As always, please do not hesitate to contact Sage Financial Investments for a Free Strategy Review or Second Opinion to discuss your portfolio or re-visit your risk profile.

*Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. Investments and/or investment strategies involve risk including the possible loss of principal. For a complete description of investment risks, fees and services, review the Brookstone Capital Management firm brochure (ADV Part 2A) which is available from your Investment Advisor Representative or by contacting Brookstone Capital Management.

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