For those of you fortunate enough to attend our event featuring former Comptroller General of the United States David Walker, you learned about the challenges our country faces. He stressed how the fiscal irresponsibility of our government will inevitability force action to be taken, with the longer we wait the bigger the problems we will have to confront. David described how economic, political, and societal divides threaten our economy and domestic tranquility. The U.S. is not the first great power to face such challenges, but in most instances the other great powers have not stood the test of time. When asked why he has taken up this mission to educate people about what we are facing, his response is simple – “We are saving America!”
Mr. Walker made a strong argument that the government’s debt load is now such a large percentage of our overall economy that we are going to face negative consequences for generations to come. His belief is that taxes will go up significantly, social insurance programs (including Medicare and Social Security) will need to be restructured, and government spending will be reprioritized and reduced. With federal income tax rates now being the lowest they will be in our lifetimes, if not ever, now is a good opportunity to review and reconsider your own retirement planning.
The Cruelest Month
Poet T.S. Eliot was quoted as saying that “April is the cruelest month…” and this year was no exception in the financial markets. The major stock indices suffered their worst monthly losses since the onset of the pandemic in March, 2020 and in the case of the Nasdaq, its worst monthly performance since October 2008 during the financial crisis. The markets showed hope of a rebound last Thursday after the preliminary Q1 GDP report was negative, giving hope the Federal Reserve would not need to raise rates as aggressively as expected since we might already be in a recession. The hopes for a rebound were short lived as the markets closed out the month on Friday with the largest single day losses since the onset of the pandemic in March, 2020. The losses were worse than those experienced during the prior worst day for the markets since that time, which happens to have been the previous Friday; a weekly trend we hope does not continue.
Earnings reports were mixed, with uncharacteristically large surprises amongst the biggest tech names. The most notable gainer was Meta (the company formerly known as Facebook) with the most notable loser being Amazon, which reported a surprise loss and issued weak revenue guidance. Apple shares also came under pressure after their earnings report as the company said they expect supply chain constraints to hinder third-quarter revenue, a common theme amongst many companies which have reported. In 2022, the S&P 500 has lost 13.3% while the Dow Jones Industrial Average has lost 9.3% and the Nasdaq sits in bear market territory with a YTD loss of 21.2%.
Earnings continue in earnest this week. According to FactSet, half of the companies in the S&P 500 have reported thus far with about 80% beating estimates. However, many have given lowered guidance due to expectations for higher costs and slowing consumer spending. Over the long term, earnings tend to drive market performance but broader concerns about interest rates, the Fed, slowing growth and inflation continue to put pressure on stock prices.
Ever since it became evident in the later part of last year that inflation was no longer “transitory” but instead “persistent” there has been comparisons made with the stagflation environment of the 1970s. These had been largely dismissed since economic activity seemingly continued to be growing and employment remains strong. However, after first quarter GDP growth was reported as being negative there is now true merit to the question of whether or not we are entering, or are in the midst of, a period of stagflation. During his remarks last week, David Walker said the answer to the question is “no” and not why you might think. He reminded us that stagflation is slow or “stagnant” growth and now that we have negative GDP growth, we could be facing something even worse.
Arguments could be made that we have not yet entered a recession, per the classical definition of two quarters of negative growth. The most recent report of GDP was only a preliminary report and subject to revision, plus we will need subsequent quarters of negative growth. There is a possibility we could swing between positive and negative GDP growth quarter-to-quarter, even over several years, and technically never enter a recession but if that were the case overall growth would be very low at best. We would expect earnings to follow with anemic growth and stock market returns to be minimal, below long-term averages. There is the prospect we could see another lost decade in the stock market without suffering a downturn in stock prices worse than what we have already experienced. While we acknowledge there will be significant challenges for the markets in the months ahead, we remain very optimistic longer term and have great hope for the resiliency of the American people and our economy.
This week is full of events with the potential to move the markets, most notably the Federal Reserve meeting where it is widely anticipated the Fed will raise short-term interest rates by 50 basis points, or one-half of one percent. The markets are now pricing in a high probability of a rate increase of 75 basis points, or three-quarters of one percent, at the June meeting as well as another half-point hike during the July Fed meeting. It is also expected the Fed will begin a quantitative tightening program, referred to as “QT”, where they will be selling bonds held on their balance sheet in an effort to reduce the money supply and further inhibit inflation. The week will be capped off with the monthly employment report on Friday.
With all that is happening in the economy and markets, it is important not to lose sight of the big picture and what steps you can take to secure your financial future. Taking advice from David Walker, families should take steps to take care of themselves and their families in light of the potential for tax and spending changes by the government. Give us a call to discuss your future so we can work together in doing our part to save America!
Have a great week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # 952-460-3260