Markets limped into the end of August giving back a portion of the July bounce. While improved, the S&P remains lower by nearly 17% for 2022 with the NASDAQ being off by more than 24%

Unfortunately for investors, Jerome Powell once again harnessed his inner Paul Volker during a speech at Jackson Hole to spark the latest round of selling pressure. At this point, there aren’t many on Wall-Street who haven’t accepted the fact that our Federal Reserve is perfectly content thrusting our economy into a recession to reduce inflationary pressure. I contend that history books will be written about this environment and eventually new policy will manifest to address not just the demand side but the supply side as well. I find it almost laughable that while the Fed is doing everything in its power to fight inflation, congress passes a bill spending billions of dollars which includes thousands upon thousands of well-paying government jobs with full benefits. I wonder how a small business owner will feel about an already tight labor market now being made even tighter with the government stepping in for a hiring spree. Most of what is happening today, I simply must shake my head and move on.

A year or so ago I wrote Debt It’s Really That Simple discussing the future realities of inflation. While the warning of what was to come was timely, I thought it important to relay what I felt to be the best offensive move, paying off debt. My rationale was simple, despite low interest rates, individuals would be able to handle rising variable prices if their fixed payments were minimal or gone altogether. I’m sure some were considering this view as stodgy or antiquated however I have still never met someone who regrets being debt free. On the contrary, I have met plenty of folks who create additional anxiety by adding debts and payments that were unnecessary.

Markets limped into the end of August giving back a portion of the July bounce. While improved, the S&P remains lower by nearly 17% for 2022 with the NASDAQ being off by more than 24%

Unfortunately for investors, Jerome Powell once again harnessed his inner Paul Volker during a speech at Jackson Hole to spark the latest round of selling pressure. At this point, there aren’t many on Wall Street who haven’t accepted the fact that our Federal Reserve is perfectly content thrusting our economy into a recession to reduce inflationary pressure. I contend that history books will be written about this environment and eventually new policy will manifest to address not just the demand side but the supply side as well. I find it almost laughable that while the Fed is doing everything in its power to fight inflation, congress passes a bill spending billions of dollars which includes thousands upon thousands of well-paying government jobs with full benefits. I wonder how a small business owner will feel about an already tight labor market now being made even tighter with the government stepping in for a hiring spree. Most of what is happening today, I simply must shake my head and move on.

A year or so ago I wrote Debt It’s Really That Simple discussing the future realities of inflation. While the warning of what was to come was timely, I thought it important to relay what I felt to be the best offensive move, paying off debt. My rationale was simple, despite low-interest rates, individuals would be able to handle rising variable prices if their fixed payments were minimal or gone altogether. I’m sure some were considering this view as stodgy or antiquated however I have still never met someone who regrets being debt free. On the contrary, I have met plenty of folks who create additional anxiety by adding debts and payments that were unnecessary.

At this moment it seems as if our markets and quite possibly our country are at a crossroads. As much as I remain a long-term optimist, it is hard to ignore the structural changes, which if remained unchecked may wreak havoc on our economic system and financial markets near and far. I don’t care if it’s PPP loans, student loans, Social Security, Medicare, or aid to Ukraine. Money spent with no real way of paying it back will result in a significant problem for future generations.

The following are some thoughts to keep in mind during these uncertain times.

1.) Look at the Big Picture

I’ve retold these stories many times but they’re worth telling again.

When I entered the business at the peak of the dot-com bubble a 40-year veteran told me I should find another line of work. He was convinced that financial markets as he knew them were gone forever. Maybe in a way, he was right since interest rate policy charted a course from that moment that has never been the same but I’m certainly glad I didn’t heed his warning and hang it up before I ever got started. The Dow was around 10,000 at that time.

When planes flew into the World Trade Center I was wondering if the business I was building would even exist anymore. We were convinced we were going to war, on our soil, and financial markets were closed for the foreseeable future. After 5 days the markets reopened and Dow 10,000 became Dow 7,200 however would climb to Dow 14,000 less than 4 years later.

During the financial crisis of 2008/ 2009 and again during Covid, folks were once again predicting the complete collapse of the financial markets as we know them. The Dow broke 6,400 in 2009. During Covid the Dow fell to a low of around 18,000. Despite the malaise this year, the Dow is hovering around 31,000.

 

2.) What Does your Plan Say?

Over these last several years we’ve been pounding the table on making sure everyone has a financial and retirement plan which consists of a look at thousands of probabilities which include market challenges and lower than anticipated portfolio returns. For folks who have gone down this path, we’ve already considered the challenges that may arise since we have hundreds of years of history as our guide. Successful planning should never be contingent upon better than anticipated market returns but rather a long-term, slow and steady approach that is able to ride out the volatility, not succumb to the pressures of the ups and downs.

3.) Buying Low / Selling High

It never ceases to amaze me that the stock market is the only place where people run from bargains rather than greedily gobbling them up. Just the other day my favorite sausage was on sale at Kroger for more than $1 off each roll. Since clearly something was wrong with them and they may cause irrefutable harm, I promptly turned my cart and ran out of the store! Clearly, I did not, but rather I bought all I could buy. Ironically some of the greatest companies in history are now on sale, selling at levels that folks would have dreamed of just a few months ago. Now that they are here however do people want to run out and gobble them up? Nope, not a chance.

Remember the bank run during “It’s a Wonderful Life?” What was Mr. Potter doing while all others were scurrying to sell their shares? He was buying them up, knowing full well that at some point in the future, the real worth would be realized and he would net a hefty profit. Choose wisely during times of difficulty. Remain level-headed like George Baily and Mr. Potter, not the folks emotionally cashing out at any level.

If you only invest when it ‘feels-good’ you will inevitably buy high and sell low, every time. Here’s a quick look back at our thoughts from the depth of the pandemic in March 2020.

4.) Control what you can control

Unfortunately, we have no control over what the market does in the short term. As much as I want a direct line to Jerome Powell we have no control over the Fed actions nor what billion-dollar package Congress approves next. What we can control however is our own balance sheet, spending and temperament. This is an environment where less is more. If you don’t ‘need’ it right now you should wait on buying it. Inventory levels are growing across industries and I can assure you whatever you’re considering buying at this moment, odds favor lower prices in the future. Maintaining a modest spending plan with a healthy balance sheet and little to no debt continues to be your best offense during this environment. Like stocks, other assets will eventually be available at deep discounts and opportunistic buyers will rejoice. I’m not sure when that will be, but it isn’t here just yet.

 

5.) Remain Opportunistic

There is something happening under the surface at this moment, while the headlines are dire and future uncertain. A changing of the guard is taking place whereby the previous companies that have led markets for several years are slowly stepping aside ushering in new companies that are set to take center stage. Whether we agree with this transition or the catalyst for it, it is happening, nonetheless.

EV, Solar, Biotechnology and all the ancillary technology that goes along with these trends are developing at a feverish pace. While Google can’t seem to find a sustained bid, still trading nearly 30% off highs, On Semiconductor (ON) a semiconductor for the auto manufacturing industry recently notched new highs and is positive on the year. A new company called Wolfspeed Technology, specializing in technology for the EV space jumped over 31% on earnings the other day reporting a block buster quarter and discussing just how fantastic business is. These are just two of the many companies I’m watching closely as they mature and thrive in this environment and may eventually take the place of fallen leaders.

There is a way to take advantage of these opportunities and that is to remain open minded to the fact that while others are selling, there are deals to be had and new leaders emerging quickly.

Seasonally we’re entering into a difficult time for the markets. It will be interesting to see how this plays out as we roll into the mid-term election cycle.

 

At the time of this writing, certain portfolio strategies had shares of ON and WOLF