Market Memo
September 2022 – By Kyle Rohrwasser
“I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it.” – William E. Simon
The most recent example of the quote above was the liquidity provided by the Federal Reserve during the COVID pandemic through stimulus and PPP loans. There has also been a slow building of a swelling governmental budget and accommodative banking practices with the use of quantitative easing (increasing the money supply). This caused increased stock prices, home prices, more economic activity, in turn more jobs, etc.… all things Americans love! Now we face the reverse as the Fed will be restrictive for the foreseeable future.
As more data comes out, the market continues to price it in well before the actual effects of the change occur. Over the next several months, the hope is that we start to see slowing inflation, which gives the Federal Reserve the option to slow or stop rate hikes. As we study the current position of international markets, we recognize the negative global outlook outside of the United States is becoming a cold reality as we approach one of the more economically challenging winters in recent history. It does appear as if the United States is best suited to handle the current global economic slowdown.
The European Union is spending roughly 12% of its current GDP on energy whereas the Unites States is only spending 5.3% of its GDP. The recent pipeline shut off has created an energy shock that is expected to last several quarters in Europe. Promised caps on energy prices and paying the difference between what energy companies would have charged will land on the government’s hands and tend to distort prices further. Over the last few decades, the United States has shifted from importing energy to exporting it. We consume less than we produce here in America which should alleviate pricing pressures and potential shortages state side.
China is having a property problem; real estate prices have plummeted as authorities seek to rein in unsustainable debt and market speculation. Hundreds of thousands of homebuyers are refusing to pay their mortgages for pre-sold properties as developers struggle to complete housing projects on time. But China’s economy accounts for almost one-fifth of global GDP meaning a major slowdown could still have a serious effect on global growth.
With a strong dollar, the cost of imports and dollar denominated debt has become more expensive relative to the foreign local currency. Since the dollar is the world reserve currency, its effects are global and powerful. This does reduce the income for U.S. based multinationals, but it in turn helps with the cost of imports. We are now in a position of purchasing power when importing materials and goods but should expect to export less in return as it is more expensive for foreign buyers. The United States is not immune to this global slowdown but should be in a better position than most countries throughout the world.
We continue to wait for more economic data (mainly inflation) to gauge how the Federal Reserve will act. This is becoming a market adage but “Don’t fight the Fed” has never been truer. We firmly believe that maintaining a well-diversified long-term approach is the best method towards long term, risk adjusted returns. Even more so now with the amount of market and economic uncertainty in the near future.
This material is for informational purposes only. It is not a recommendation or solicitation to buy or sell any securities. Vantage Financial is not a tax advisor; please consult your tax advisor prior to making any investment decisions. Vantage Financial is an Investment Advisory Firm registered with the Securities and Exchange Commission (“SEC”). SEC registration does not imply any particular level of skill or expertise.
https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/weekly-commentary
https://www.aljazeera.com/economy/2022/8/30/what-chinas-property-crisis
https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/eye-on-the-market/cpi-sp-ghg-and-the-irs/
https://www.eia.gov/energyexplained/us-energy-facts/imports-and-exports.php