Article 3 of 3: 2nd Quarter Commentary
As things stand today, we could see a recession occurring sometime in 2023. We certainly do not expect a repeat of 2007/2008, but we do expect equity prices to lose value as all the fears associated with a recession are generated.
Typically, markets peak about 6 months before a recession which means there is still time for markets to absorb interest rates, assess the trajectory of inflation and supply chains, and recalculate prospective earnings and related valuations. Nascent softness in the demand for durable goods – which along with other related data points (mortgage demand, freight pricing, rent escalation, etc.) – could mean inflation is peaking as consumers pull back. Consumers have rarely been as financially healthy as they are today, but forward-looking consumer sentiment indexes are reflecting growing worries.
With the economy still strong, stocks could drift sideways or even rise for some time before the dampening effect of rising rates slows the economy. However, current valuations remain relatively high and with impending slowing economic growth, additional market gains from here will be muted.
All this argues for maintaining a cool head as we move forward.
Yes, we have challenges ahead and rarely have so many variables simultaneously been in play. We began to reduce our clients’ risk exposure towards the end of 2021 but are reticent to take a completely conservative risk posture. With so much negativity in abundance, it wouldn’t take much good news for markets to respond positively. Still, we are conservative by nature and recognize that the Fed has a very poor track record in cooling inflation without inducing a recession. Therefore, we anticipate shifting more conservatively during market rallies this year and assuming an even more conservative posture over the next year. We will endure elevated market volatility and tread carefully to get there.
We have the structural protections of segmenting client assets across time to weather serious downturns.
We encourage our clients to continue living life without stressing over volatile markets. Let us do the worrying! A downturn won’t last forever, and we plan for our clients to be in better shape than most coming out of it.
If you’re interested in our layered risk approach that brings clients greater peace, reach out to us to discuss your situation.
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