I order a large half cheese, half pepperoni pizza EVERY Friday. Anyone want to take a stab at how much it is? It's $36.48. Thanks inflation.
Now, I’m not going to bore you with all the details about inflation because you’ve probably heard them all before….
Just kidding, I’m totally touching on the details.
I’m writing this ahead of more recent inflation data dropping this week. BUT, the previous reading came in early April with an awesome 8.5%. Let’s put that into context: as of March 31st the amount of income that needs to be generated on a savings account with $100k to beat current inflation levels is $6,416. The amount of income CURRENTLY generated off $100k in savings today? (VIA JP MORGAN ASSET MANAGEMENT)
Yes that’s correct.
Also a quick plug to our most recent podcast episode, where Dash Capital discussed it’s thoughts on the current stock market and economic environment. You can also listen on Spotify and Apple Podcasts. I promise -- you’ll have fun listening!
So how did we get here?
A prolonged period of low interest rates, record QE levels (money being pumped into the economy), supply chain issues, a sudden reopening, and wage increases to incentivize people to come back to work. A scorching economy.
Simply put, inflation is caused when there are too many dollars chasing too few goods. The demand is higher than the supply which causes prices to rise. I’m not going to hit you with all the fancy lingo but think about it this way:
Everyone went to go spend their money at the same time when the country opened back up and the supply levels couldn’t keep up. There weren’t enough “things” in circulation for people to buy.
To put things in perspective, I swear that $36.48 pizza was $34.48 last Friday (not really).
How do we stop it?
Well, for one, supply chain issues resolving will help. However, the more mainstream answer you probably see everywhere is: Interest Rates.
The fed’s job is to pull different “levers” to maintain the country's financial stability. Think of it as a balancing act.
Inflation is a signal that spending levels are too high and the economy is too hot. In order to offset this the fed pulls the interest rate “lever” to curb spending. An increase in interest rates disincentives spending. If spending slows, inflation will cool. We essentially want to “slow” the economy. I know, seems backwards... stay with me!
What does this mean for the stock market?
Simply put, a decreased level of spending by the consumer hurts businesses, which in turn hurts the stock market. It’s a tradeoff. High inflation readings, a slowing economy and an aggressive tightening by the fed is weighing on equity valuations.
Additionally, tech is seeing a larger sell off as the Nasdaq is down about 25% YTD at the time of this writing. The value of anything financial is the present value of the cash you can take out of the business over the course of its life. Fundamentally, when you buy a growth/tech stock, you are investing in that company’s FUTURE GROWTH, not necessarily it’s current value. Because of the uncertainty of their future growth, and cashflows due to interest rates increasing, valuations become stressed.
It looks like markets are pricing in three consecutive 50bp hikes by the fed. The question on everyone’s mind is can inflation head below target (3%) without a recession coming into play? The fed's soft landing is in question.
What can I do?
Budget😊 That answer kind of stinks but it’s true. If you haven’t revisited your spending this year, this is your sign to do so. You’re probably accidentally spending in areas that you normally wouldn’t overspend in due to the rise in prices. Plan accordingly as the storm continues.
As for your asset allocation, always remember a long-term mindset in the face of short-term headlines will always emerge victorious. The Nasdaq is down 25% YTD but is up 2000% since inception! Take this time to review your risk tolerance, time horizon, liquidity needs, and most importantly – your goals.
More specifically, during times like this, I think the mantra “be a net buyer of stocks” is prudent. Additionally, we believe over the long term, growth will still be a winner, despite the recent tailwind. However, in the short term, a slight tilt towards value stocks and companies with stable cash flows may be more appropriate. Cyclically oriented and defensive sectors have more reliable valuations during times of turbulence than their growth counterparts. Lastly, higher rates should bode well for financials (banks make more money when money is more expensive) while higher commodity prices should support the materials, energy, and industrial sectors.
The bad news?
It’s probably going to get worse before it gets better.
The good news?
We’ve been here before. There has never been a time period in HISTORY that the market has not recovered from. From 1950-2000 there were 38 years when the S&P was in correction territory. 24 out of those 38 corrections ended in less than 4 months. (Via Sean Williams and Brian Feroldi)
Stay the course, friends.
And as always, #maxyourdash