The month of April saw gains in most sectors of the market. The S & P 500 was up, but domestic small cap stocks were down. This likely reflects the weakening economy that hits smaller companies first. This same split was seen between foreign developed stocks and foreign emerging stocks, as the more developed stocks were up yet the developing stocks were down. Most sectors remain in a medium-term upswing, yet are still in a long term down trend.
Domestic real estate was essentially flat and foreign real estate was down. This also reflects the weakening economy and rising interest rates. Watch for the coming commercial real estate bubble to continue to deflate, which will put pressure on lenders. Commodities continued their drift downward, also reflecting sentiment about the economy going forward. Bonds, both government and commercial rose a bit as rising rates have yet to impact them harshly.
If you are practicing sound stewardship as a long-term investor then you probably saw more gains in your accounts in April, as you did in March. You may still have some accounts underwater, depending upon when you entered those positions. If you have a long time horizon then you will see no reason to panic, and likely stay the course. If you are within 10 years of planned retirement you may want to pull back as you begin the transition to the distribution phase of your financial life. As people of faith we should always take the long view and know that there is never a reason to panic. As always remember the four pillars of investing:
- Simple Strategy
- Rule Based
- Emotionally Attainable
See here for more information.
The near-term economic outlook continues to remain problematic. There remains a high degree of probability that the economy will tip into full blown recession within a year. The Believe and Obey Recession Indicator remains at a full 100%. The Federal Reserve continues to tighten the monetary environment and even if they pivot tomorrow this previous tightening will work its way through the system to the detriment of the economy. In any event, the previous “stimulus” money has not itself flushed through the system, which means continued upward pressure on prices. The Fed has little choice but to continue if they want to squeeze the damaging consequences of inflation out of the economy (that does not mean that they won’t panic and pivot, however).
In spite of the rose-tinted glasses through which the market is viewing the world, if and when that recession arrives the drop in the market will be significant. Proof of the rose-tinted glasses view of the market is the fact that the Believe and Obey Bubble Barometer actually rose last month from 134.32 to 136.90. For information on the methodology of these indicators see here.
I stand by the view that I outlined earlier this year. Given the continued high level of federal spending and the increasingly large structural deficits that necessitate large amounts of borrowing one of two things will likely occur. If the Federal Reserve keeps raising interest rates or even if they maintain them at the current level then longer-term rates will go up because the US government will crowd out other borrowers in competing for people to buy their debt.
If the Federal Reserve panics in the face of a recession and pivots toward lower interest rates then the market may rise for a bit, but inflationary expectations will sink more deeply into the economy. This will cause long-term interest rates (rates the Fed can control the least) to rise to build in an “inflation premium”. This will cause a downturn in the economy, possibly creating a “stagflation” situation. Either way it is not likely to look pretty.
Also, I would not excessively worry about the debt ceiling standoff. There is likely to be a deal before anything significant happens. In any event the panic drop of the markets would likely be temporary until the ceiling is raised. As per usual this short-term activity is just so much noise to those with a long-term perspective.
I would also not pay much heed to the so-called “draconian” spending cuts related to a debt ceiling increase. All that is being proposed is that the discretionary portion of the federal budget (currently about 30% of the total) be returned to 2022 levels and then grow at 1% per year for the next ten years. History would argue against Congress holding to this even if they initially agree upon it. First, the “defense” budget will be exempted (this is about half of discretionary spending) then the rest will be allowed to grow as well. Of course nobody is even discussing the 70% of the federal budget that is on autopilot and heading straight for the fiscal cliff.
In any event, all a refusal to raise the debt ceiling would do would be to put the US in a binding balanced budget situation. In this state there are enough revenues to meet the contractual obligations toward bondholders, as well as pay the Medicare/Social Security recipients, and also to fund the Pentagon. After that spending would need to get prioritized. The “doom” scenarios are being peddled by those self-interested financial Pharisees who have their hands in the pockets of ordinary people. The reality of this would, in time, be healthy for the real economy.
So, be prepared for some difficult financial moments ahead. As always, prepare for those moments assured of God’s love for His children, and our ability to weather the storm having faith enough to use the brains He gave us.
Praise Be to God