V Shaped Stock Market Recovery?

Is the stock market going to rebound and go back up? Or are this year’s losses only the beginning of a much larger decline?

I am shocked by all the market analysts and investment advisors who are painting a rosy picture for the second half of 2022 and beyond in 2023. But you need to understand the bias that taints their positive statements.

Most investment professionals are paid through management fees that they only collect if you stay invested in the stock market, so encouraging you to remain invested simply lines their pockets with more management fees. They may warn that you will miss the upside if you hide in cash, but don’t forget how they get paid. What they are really saying is “keep paying me fees, please.” The popular “invest for the long term” and “buy-n-hold” strategies are just another way of saying “keep paying me fees so I can pay my mortgage.” Fee based charges could become a conflict of interest encouraging your financial advisor to recommend staying in the stock market during declining periods instead of going to cash to avoid losses.

Three reasons a quick rebound might not be in store this year or next.

We have not seen inflation anywhere close to the current levels in 40 years. The last period with high inflation was 1973 through 1981, and it took nearly a decade to get it back under control. Inflation is a self-reinforcing economic spiral that is very difficult to break out of, and simply increasing interest rates may not be sufficient to reverse the trend. I believe that theories of transient inflation are not based on facts, but instead on wishful thinking. Today’s businesses have no experience managing in a high inflation environment and are likely to suffer large losses, particularly if they misjudge the duration of this period.?

Today’s corporations emphasize short-term credit facilities. They focus on the short-term borrowing in order to get lower interest rates. This short term focus leaves them hyper exposed to the current shocking interest rate increases.

The federal funds rate hit 20% in June of 1981, then dropped to under 8% in 1990. And for most of the last 20 years, it has remained under 2%. Many corporations have forgotten how to deal with rising interest rates. These rates are likely to persist long enough to seriously impact second half corporate earnings. Higher interest equates to higher cost and lower profits for most corporations.

As the Ukrainian war drags on, the global and US economy will continue to be impacted. Stock markets hate uncertainty and the threat of nuclear war is the ultimate uncertainty.

In this environment, a strategy that allows selling investments to avoid declining markets is essential. Even better, a method to actually profit from a declining stock market must be sought. The people at Serenity Wealth Management are eager to discuss if these or other strategies are appropriate for you.?

Curtis Hill, CFP 213-509-8245 [email protected]