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Inflation.

Inflation continues to push itself to the top of the list of the market moving forces these days. Everyone (myself included) is parsing any and all data regarding the direction of inflation. Recent numbers potentially indicate that inflation could be beginning to decelerate, meaning we may be nearing the top of the inflationary hill. The Federal Reserve is expected to move forward with half percentage point rate increases at each of its next two meetings and will soon start shrinking its balance sheet. Translation? The Fed will make lending costlier to slow inflation and the economy, while decreasing the money supply.

Corporate earnings and commentary.

Recent market volatility has been due to commentary and earnings reports from some of the largest retailers (Walmart, Target, Amazon), indicating shrinking margins. While their sales were robust, their ability to pass on increased costs from labor and materials was not. The good news? The consumer is still in a solid spot and has spent regardless of inflationary pressures, tapping into savings to do so. It remains to be seen how long this spending pattern will last.

We are also beginning to see more headlines regarding corporations cutting costs in labor and projects. Check here for a list of large companies announcing layoffs and/or cost cutting measures. While many of these same companies saw explosive growth from pandemic-related changes in consumer behavior, the cuts may still point to something more sustainable. 

“Recession or slowdown” semantics.

Economic commentary is increasingly pointing to the potential of a recession in the next 6-18 months. I have also been considering the narrowing path the Fed has to lower inflation and avoid a recession. In the end, it may not matter as the current market volatility is unlikely to dissipate until inflation appears materially improved. The stock market is a leading indicator, typically struggling before you realize there is a problem and healing before the problem is resolved. Are we looking at a coming recession in the next couple of years? Maybe, but I would argue that a slowdown and the current market malaise is not really any better. Market gyrations like we have seen over the past 6 months are hard to swallow.

The best salve for this market volatility? Remain committed to long-term investing and stick to your financial plan. Look back at the “Great Recession” of 2007-2009. See how far we have come since the bottom in March 2009 or from where the markets officially entered bear market territory in 2008. We are materially higher in both circumstances. The lesson here? Commit to long-term investing and you will see the other side of any slowdown, recession, market malaise…whichever phrase you choose. 

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