Continuing on with our theme from last month, we see the markets remain on the path to normalizing. I know this might sound like crazy talk, but indeed, it is true. Proof of this statement lies in the fact that we are seeing big swings in the various markets we watch and invest in to build portfolios. Contrary to what you might believe, volatility is a good thing; it tells us there is debate on the price of assets, and it also creates opportunities.
When asset prices are not volatile and head only in one direction, your radar should be going off. Take the stock markets since the Great Financial Crisis of 2007-2009. Once the Federal Reserve of the United States began unprecedented support of the markets here, the charade was well underway. Markets are supposed to find their own way. We call this, “price discovery” and it is the very essence of what a free market is all about. When you put the heavy hand of a few government officials in charge of princes, undoubtedly they will make mistakes, and many of this quite large.
Day of Reckoning is Here
Although it was one big asset price bubble and quite fun if you owned stocks and bonds, to a large degree it was fake news before fake news. Prices were going up with very little rockiness, but the reason behind the atmospheric rise was largely the result of the Fed printing money and tossing it into the markets in a variety of ways. In 2022, we got a big reality check when the Fed ended the party and did a full 180 degree turn. Not only did they stop supporting markets, they began taking the punch bowl away. Chalk up a -33% drop in the NASDAQ, -20% in the S&P 500 and a -15% drop in bonds to a stingy Jerome Powell.
Now of course, he had very good reason to try and slow the economy down; our long lost friend Mr. Inflation made an appearance like we haven’t seen in nearly 50 years. But there’s a problem with trying to slow down the US economy with higher interest rates. A good portion of the inflation Powell is trying to fight is not really the result of too much money floating around in the system looking for a home (although that is a big problem).
We have little choice at this point. There will be riots in the streets if you keep running prices so hot that people are having a hard time putting enough food on the table or heat their homes. So for now, interest rates are on the rise, (although the rate of the rise is slowing) and you should expect more. Where this ends, we do not presume to know and aren’t going to try and out guess everyone else. What we are going to do is continue to adjust portfolios to keep them in alignment to what is working, no matter what the interest rate environment.