I write all the time and have come to appreciate a good acronym. They’ve become a useful tool in the zeitgeist of the digital communication age.
Everyone knows "YOLO" - you only live once - it’s a common refrain for guys rationalizing the purchase of a big screen TV.
Who doesn’t recognize "LOL" and its cousin "LMAO", which means laughing uncontrollably. I’m a fan of IMHO but don’t even ask about the long hand for SNAFU and FUBAR.
The investment industry also has acronyms, two of which are pertinent to recent financial times. There’s "FOMO" - "fear of missing out" - and its corollary, "TINA", meaning "there is no alternative".
As the stock market roared back to life after COVID, fueled by trillions of government money and a zero-interest rate monetary policy, many investors embraced FOMO, piling into tech stocks and cryptocurrency as they soared in price. The FOMO factor helped to juice growth stocks and crypto to nosebleed values in late 2021 that rivaled the internet stock bubble of 1999.
Moreover, with interest rates held at zero percent, bonds and cash were rendered un-investable. The upshot was that stocks kept climbing briskly in 2021 due to the TINA psychosis of buying stocks absent other good choices.
To be sure, FOMO and TINA behavior created a helluva (growth) stock market bubble by December 2021 - which popped in 2022.
I’m still confounded by the Fed Reserve’s view that the 2021 inflation episode would be "transitory", even after the record level of COVID-related government spending and money printing. What an historic miscalculation.
We didn’t fall for this nonsense and sidestepped the bond market crash of 2022. We did not, however, avoid the capital market crash this month as there was no financial rock under which to hide.
The Fed, staffed with thousands of economists with apparently little common sense, kept interest rates at zero percent until late ’21 until it could no longer ignore the inflation wave. By then it was too late and runaway inflation, the likes of which we haven’t seen in fifty years, has severely damaged living standards and investment portfolios alike.
Unlike recent stock market crises, when the Fed rode to the rescue with interest rate cuts, its hands are now tied and can’t cut interest rates until inflation has been tamed.
As we enter October, investors face a multi-dimensional predicament:
• Stubborn inflation in food, energy, housing, goods and services causing real economic pain, especially for lower income households.
• A national housing price bubble that has sprung a leak.
• Rising mortgage interest rates approaching 7% (!).
• Shortages of nearly everything due to global supply chain disruptions.
• Global stocks down 20% or more; "innovative" tech stocks down 60% plus.
• Investment grade bonds down double digits, the worst performing year in US history!
• A major war in Europe that has disrupted the global economy and stoked global inflation.
• A soaring US dollar punishing economies around the world and causing damage to international investments.
• A slowing US economy either entering a recession or barreling towards one.
Given this list, it’s no wonder that investors hit the panic button a couple weeks ago when the Fed announced yet another 0.75% hike in the Fed Funds rate and re-doubled their commitment to stamp out inflation.
In bear markets - like now - I still marvel at the intensity of the panic behavior by investors and the tidal wave of over-selling that defies reason - and creates opportunities.
How and when do investment conditions improve? The "when" is unknowable but, based on history, the "how" is measurable.
For starters, the Fed will have to cease raising interest rates, which is predicated on improving inflation data. You can’t have a well-functioning stock market until the bond market returns to normalcy, which won’t happen until inflation subsides and rate increases stop.
Connecting the dots, better inflation conditions will lead to better bond market conditions, which leads to better stock market conditions. The single biggest factor that arrests a stock bear market is actually an interest rate cut.
So how does the inflation problem abate? Well, higher interest rates will constrict consumer and business spending but runs the risk of causing a deeper recession. China, which remains in extreme COVID lockdown, compounding the supply chain bottleneck, will need to re-open for business. Finally, a favorable resolution of the Russia-Ukraine war would ease pressure on energy and fertilizer costs; that’s not happening before next spring, at the earliest.
Rising interest rates are propelling the US dollar value to great heights. The dollar has jumped 15% against world currencies in 2022, the biggest dollar rally in forty years. The robust dollar is spreading more inflation around the globe and taxing global growth, further increasing recession pressures.
The likelihood of a recession in 2023 is certain; it’s only a question of the severity. Massive fiscal stimulus post-pandemic staved off an economic crisis, but the hangover is high inflation, a massive debt overhand and ultimately a recession.
We don’t believe the coming recession will be severe due to the serious US labor shortage and the end of China’s economic coma. Yes, interest rates are rising fast but still pale to 1981 when the Fed Funds rate hit 20%. Investors are freaking out about a 3% Fed Funds rate!
Should the bear market persist, investors can purchase quality stocks in quantity. Blue chip value and growth stocks should perform better than momentum and smaller sized stocks during a recession. Bonds are starting to catch our eye as interest rates keep rising.
A recessionary silver lining could be lower interest rates in 2023, which could foster a drop in the dollar, providing some relief to your beleaguered bond and international investments.
To sum, you can’t sell investments in the teeth of a stiff bear market. There is no TINA strategy other than to trust your investment plan and stay fully invested. Times like now is the risk price you must pay to create/protect real future wealth and income.
Until next time, be well…Tim