This past quarter has been a prime example of why we cannot make investment decisions based on the 24-hour news cycle. If we look back to March of last year, the loudest voices have been screaming that we are heading into an imminent recession, yet the economy continues to expand (along with the equity markets). With the interest rate increases the Federal Reserve has made over the past 18 months, we may still slip into a recession, but these events cannot be timed. Historically, when everyone is predicting a specific event will happen, it rarely does. As we move through this “normalization process” following all the economic stimulus that was given out during the pandemic, it is likely we will have at least a mild recession to remove all the excesses from this period.
One of the biggest changes that has occurred with rising interest rates, is we now get paid to hold cash and other fixed-income instruments (i.e., Bonds). The safer part of our portfolio has been a drag on returns for years, and that has all changed within the past 18 months. If we can believe what the Fed is saying, we can expect higher interest rates in the foreseeable future. Their public statement is they are committed to this fight against inflation and will not make the same mistakes that were made during the 1970s when the then Chairperson of the Fed, Arthur Burns, wavered in the fight against inflation. In the current battle with inflation, the Fed is raising interest rates to make money more expensive so individuals/businesses will spend less, easing the pressure on prices. At the same time, the Fed is taking money out of the economy to reduce the supply of money, so there will be less money to spend. These are the two policies the Fed has at its discretion. The big one no one is talking about is fiscal policy in Washington. Our legislatures cannot seem to get a grip on the fact that they are only adding to the issue of inflation with all the deficit spending they continue to do. With the recent downgrade of U.S. debt by Fitch*, this will begin to resonate with those elected in Washington that it is time we also become more fiscally responsible as a country.
As I have discussed this “great normalization process” from the pandemic with you in past articles, I have shared how there is not a time in recent history that we can compare this to. We appear to be late in an economic expansion, yet employment is strong and continues to recover. Personal, Corporate, and bank balance sheets are solid. There are record amounts of cash sitting on the sidelines. The process of global corporations moving away from exclusively manufacturing in China is just beginning. They have devised terms to describe this process; near-shoring, friend-shoring, and re-shoring. These terms all describe the phenomenon of companies moving manufacturing facilities to the U.S./North America, or countries more friendly to the global economy. The semiconductor space is a perfect example of this here in the U.S., where it is estimated there are currently over $250 billion in new chip-plant construction projects. This will not only secure our chip manufacturing process, but it will add immensely to our economic production here at home. This re-shoring movement has the potential to have a major positive impact on the U.S. economy for decades to come, as well as increasing U.S. national security.
Fall is always my favorite time of the year as we begin to get a break from the Texas summer heat! I may intentionally spend more time outside this year as we enter another Presidential election cycle. If you look back through history, these campaigns have always been contentious, it is just harder to remove oneself from all the negativity with the advent of modern technology. I imagine there will not be many constructive discussions over the next 13 months, just finger-pointing and blame. We must figure out a way to stay informed, yet at the same time, limit the amount of media coverage we expose ourselves to. The more media coverage a person watches, the more negative their outlook is on things regardless of what channel a person is watching.
It is imperative that we remember we are investing in the greatest companies all around the world, not political parties, or even countries for that matter. We, being patient, long-term, goal-focused investors know there will be periods of slower economic growth and even declines in the markets. This is all part of the process if one wants to realize the full return of equities.
Your thoughts and comments are always welcome.
Brett S Carleton, CFP, ChFC
*Fitch is one of the big three global credit rating agencies.