May 25, 2022

It Doesn’t Always Take an Expert

As the stock markets continue their volatile decline and the short term technical indicators are begging for a correction, why is the narrative owned by the experts? After all, what is an expert in the world of investment? I’ve always held that if the markets were that easy to navigate, why wouldn’t there be an expert in the history books, although some thought Bernie Madoff was an expert. In short the future still can’t be predicted, the data used to suggest probable outcome is available to all of us and cries of recession and impending doom are better left to the Algochums and Pindudes. And, oh yes, the Fed.

Today the Fed released the minutes of their last meeting that reconfirmed much regarding their increase in Federal Funds Rates, and their position on future activity in their fight to contain inflation. Many of their comments focused on economic factors, and since the Fed increased rates earlier in the month a number of releases of economic data have continued to show mixed results coming from higher Treasury Rates. What is worth noting is that recent earnings releases from a number of well-known retailers, Walmart (WMT) and Target (TGT), both showed revenue and operating expenses that were evidence of both slowing consumer activity, and rising costs of shipping and distribution. The stock prices declined, more than necessary in my opinion, on the guidance that most company CEO’s use to give a picture of expectations of the coming quarter. The market went down, and the short selling followed, taking the short term technical’s further into oversold territory.

But, as more and more retailers present that same dilemma, including a pause on hiring as a means of offsetting the increased expenses, companies beyond retail have been experiencing their own sign of earnings slowdowns. This week the social interactive app company Snap (SNAP) saw their stock decline as a result of declining ad revenue, which served growing concern for companies such as Alphabet (GOOGL) and Meta (FB) which relies extensively on ads to feed the broad number of complex and expensive projects. In the past month the markets gotten some inkling of the current ad climate when the two companies mentioned and other tech companies previously suggested taking a pause on hiring new workers, until an uptick in customer activity emerges.

Which takes me to my main point. The markets have been in an ugly period of volatility this year on the back of rising inflation that appears to have taken everyone by surprise, including the Fed. Levels not seen since the 1980’s has fed the fear and the loss of value, as of today the Down Jones Average, The S&P500 Index and the NASDAQ are all down for the year -11.6%, -16.5% and -26.9% respectively. The takeaway has been the rising likelihood of a recession. Now, I ask the question, which is lost in the expert narrative of the dangers we’re in, since when, in the fight to bring down inflation, is a recession a bad thing? And in today’s world of employment, jobs will certainly be lost, but pausing hiring is not the same as losing jobs and in past economic slowdowns the concern of job loss has been enough to give consumers a reason to pause their activity as well.

This is not the best environment to wish for, but in the past the Fed initiated a recession that was far more devastating than the one that is coming our way. The key is that it brought the inflation rate down and even some of the underlying inflation as well. And that’s the goal after all, isn’t it?  As far as the equity markets are concerned, stocks are about the future and if the recent decline in stock valuations, and the rise in interest in consumer staple stocks, such as Pepsi (PEP), tell us the future holds an economic slowdown, the corporate and economic data agrees. I’m not convinced the selling is over, as a lot of problems, domestically and internationally, have to see some genuine resolve. But in the meantime, there is enough data to suggest we’re on our way, and that’s a good reason for the markets to have a much earned and classic relief rally. And then we’ll see.


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