The Hands of the Economic Clock
It's high noon, yet a recent economic report tells you it's 10:00 AM, and the stock market says it's 2:00 PM. So which time is correct?
As understood through samples and indicators, the economy lives in the past. Conditions discovered today are like photographs of a past event; A wedding cake cut, a bouquet tossed. Inflation, manufacturing output, retail spending, and home sales; when we look at these data points, we know these are past measures of economic activity.
The stock market, on the other hand, is forward-looking. Investors are making predictions and pricing in possibilities. When we invest today, we forgo consumption with an expectation of higher purchasing power in the future.
What time is it?
The highest level of price inflation in 40 years, the highest level of interest rates in 15 years, and the first year in 50 years that both stock and bond markets declined simultaneously. In 2022, the U.S. stock market is down 24%, while the bond market is down 15% through September. International stock markets, negatively impacted by a strong U.S. dollar, are down 26%.
We don't get to choose the times we live through, and in the near term, uncertainty is the highest. We plan for this. Financial markets adjust daily to expectations and look to tomorrow's opportunities.
A Fed Pivot?
Looking ahead, we expect the U.S. Federal Reserve will continue the well-telegraphed path of increasing short-term interest rates. Their goal is to reduce inflation without triggering a recession – a difficult task with an unfavorable track record throughout time.
When the hands on the economic clock seem stuck at 10 AM, we might believe it will be 10 AM forever. We know from experience that the stock market and the economy experience inflection points, which tend to represent and occur at different times. Markets are watching the Fed for cues that could signal a shift or pivot to accommodative policy, read: lower interest rates or quantitative easing. We don't know when or how this will play out, but history suggests it will.
By segmenting investments into short, medium, and long-term periods based on your financial life, we plan to carefully navigate the near-term uncertainty while positioning for long-term growth and returns.
Whether it's 10 AM or 2 PM or high-noon, the shift from market bottoms to the start of the next bull market advance can be dramatic. As investors, we don't want to be late to the party.
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