On Money & More – July 2022

After first quarter US Gross Domestic Product shrank 1.5%, and with second quarter GDP trending toward 0%, recession concerns are appropriately on investors’ minds. A recession is typically defined as “two quarters of negative growth,” and whether or not the US officially meets these numbers—unofficially, things sure feel that way. Recent readings of consumer confidence have been below the depths of the financial crisis. For the first time in decades, “stagflation” has become a concern—a term coined for periods of high inflation and low-growth. This sure sounds like a reasonable way to describe the current economic environment.

With stocks near their lows of the year and the economy seemingly in the dumps, investors at times like these often do some “soul searching.” Why do I invest in the markets? If we know there is a recession coming, why not sell now and buy later? Should I put all of my money in gold bars and bury it in my back yard? (Please do not do this.) It is ok to ask these kinds of questions, but much like asking, “Is there a God?” we think these questions ultimately lead us back to the same answers. Investing in stocks has proven to be the best way to build wealth in human history. Well, stocks and railroad monopolies—so there are a couple of options at least. In all seriousness, let’s ask a few questions that are pertinent for investors in these distressing times.

What should investors be doing right now? We have invested through recessions before. And inflation. And geopolitical conflicts. These are known problems, but for most of us, the investing problem is timing. For those with immediate cash needs, a bear market can be devastating. In this case, focus any withdrawal needs on fixed income assets, which tend to hold value better than equities. Your portfolio cash flows (dividends and interest) are a great source of consistent funds. For those with a longer-term horizon, consider the historical record of stocks and be patient. Remember stocks typically turn higher before the economy gets better, which is why timing the market is so challenging.

Will inflation get better? Cutler’s view is yes, inflation will begin to moderate. Inflation, which heated up over the past year, has seen several new developments in 2022: The War in Ukraine and subsequent embargo of Russia has impacted food and energy prices. China has sustained lockdowns to attempt a zero-covid policy. And decades of atrophy of oil refining (the last US refiner was built in the 1970’s) have led to a shortage of gasoline. While these factors are all inflationary, consider the deflationary forces at play. The Fed is currently anticipated to raise rates to around 3% this year. Government spending, primarily due to a roll-off of stimulus funds, is forecast to drop $1.7 trillion this budget year. Housing appears to already have peaked, with inventory up alongside mortgage rates. This presents a mixed picture, and we do not believe inflation will be solved overnight. However, central banks are tightening around the globe. Inflation is on notice.

How bad will the recession be? A recession is not a sure thing but looks very likely. Consider, though, that markets have had a great run. Consumers entered this downturn with minimal debt and great savings. On-the-whole, our economy is on solid footing. Yes, risks abound, but investing always has risks. Our view is that the economy’s underlying strengths (such as a low unemployment rate) will lead to a shallow recession, not a prolonged period of weakness. Much of this depends on the Fed’s ability to reign-in inflation, however (see question #2 above). Even with an economic downturn, we view equities as the best way to keep up with inflation, unless you happen to own a railroad!

All opinions and data included in this commentary are as of June 13, 2022 and are subject to change without notice. The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or individual investment advice. Nothing herein should be construed as tax advice. This article is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase or sell securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Investing involves risk, including the potential loss of principle. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.