Before I start, let me reiterate my humble opinion on where we are. I think that the economy has been (and continues to be) hit with three powerful forces that under normal times would be market moving, but woven together is unprecedented. I don’t use that word lightly and these are really unprecedented times.
We have the end of a devastating pandemic which none of us have ever experienced. We have a full blown war in Europe which very few of us have experienced. Lastly, we have a period of high inflation, something we haven’t dealt with in over 40 years.
I won’t even bring up the tumultuous last two years politically and socially. That I will leave for Wednesday’s column but you get the bigger picture here. Things are sliding downhill and I find it hard to believe that with all of this upheaval, we think that the market has found a bottom and will rally substantially from here.
Over the years I have been called many things but being a pessimist wasn’t really ever one of them. I am a half full type of person. However, in the last year or so, I have not drank from that Kool Aide every investor drank from. As the market went higher I felt things were getting a little too unrealistic and that climb has to end and things have to resort to more realistic expectations. Over the last month, we have gotten a taste of that realism.
The mechanism that pumped helium into the economy is ending and the economy should deflate somewhat as we reach a more realistic growth trajectory. Thats what is happening now. It took inflation, a hesitant Fed and all the media on the planet to acknowledge what we knew for months. Prices were going up. Producers had plenty of excuses to raise prices (some real, some dubious). Along with that was this new paradigm, workers thinking they were better off not working and exploring new options.
Back to bottom fishing. If you are looking for Carp or Catfish it works well but if you are an investor, you may want to rethink your strategy a bit. While it is very similar to trying to time a market bottom, bottom fishing can actually be an effective strategy since, as an investor, you buy on the dips and your macro view is a lot longer than someone who might be a market timer. I am not a huge fan of either but I do understand the principles behind both.
If you dollar cost average your investments, you will at times, bottom fish, but that is not your elected strategy. You average out your purchases through bad times and good and at the end you will be where you want to be and have earned steady growth over time.
The past week has been about what some investors perceive to be the bottom of this almost bear market. They have jumped in looking to capture what they say they captured in March of 2020. That falling knife was the perfect time to execute the bottom fishing strategy by the way. The market crashed horribly in two short weeks and it was a true oversold market. That is the when you actually can successfully use the bottom fishing strategy. Not now.
In March of 2020, we had huge unknowns. We had an economy that was running at full capacity until it wasn’t and that wasn’t a slowdown, that was a full on brakes screeching stoppage. That is when you bottom fish. That is when the signals are all green but the train isn’t moving. That is when you buy.
What we have now is a legitimate corrective phase. All signs point to a more common growth rate. A tighter monetary policy should also slow things down. A possible recession in the near term is another component of this correction. It is all to be expected and to see the market pullback over this span of time is not unusual.
Do I like corrections? Yes., when they make sense based on what I know from the past. They are healthy and very good for long term sustainable growth. Do I like true bear markets? No, I don’t. Bear markets can signal all sorts of things, most of them not positive. With that being said, bear markets over time are screeching because they always signal something unhealthy about the economy, a sector or a company. They happen though and you just have to live with them.
I do think we will be going into a bear market because I do think that there are other signs out there that people are ignoring now but won’t in due time. The housing sector for one. It is going to pull back and remember, no recession has ever started without the housing sector contracting. We will see the housing sector contract. It won’t collapse ( I don’s think) but there will be several months of rising inventories, rising interest rates and falling prices.
A real recession for another. Rarely, will you ever see rising interest rates not cause a recession. It’s simple economics. Rising rates, reduces consumer spending. Reduces corporate spending. Reduces corporate earnings. Reduces hiring. That spells recession.
Two final thoughts;
With all of this, I have not mentioned the administration and it’s ability to screw things up even further. Rest assured they will.
Secondly, if and when we do roll into a recession, what will happen when all of those people that left the work force for a better life doing something else? If we are in a recession, I don’t see a lot of people buying artisanal kombucha at a green market. Trying to build a better World is a noble pursuit but when your Wifi bill is due and you can’t pay it, you might rethink ESG and think steady paycheck. The end result is that the employers will again have the power and the employees power will lessen.
As I see it, Another peek into our future, and its not looking good for awhile, be prepared. Good Article, Thanks Again!!