Inflation, recession or market crash?
What the data suggests right now and how to navigate the pain.
The stock market has been going south for many weeks now. Fear of very high inflation has been the main cause. Why? Too much inflation triggers central banks to raise rates and to decrease liquidity in the economy. If they do this for too long or too fast, then a recession may be the price. And recessions equal “Bear markets”.
I have been optimistic on the stock market for a long time as coming out of the pandemic the economy has been recovering, companies were making lots of profits (and still doing so) and credit conditions were healthy.
A recession is always predicted by a deterioration of credit conditions. And during recessions the stock markets go down.
So what?
Best case scenario: the data about inflation starts to cool off and the Federal reserve starts to be more dovish (less hawkish), the economy avoids a recession and the Stock market starts going up again. This migth happen before September and as early as next week.
Worst case scenario: inflation data keeps looking “out of control” concerning, the FED keeps the hawkish position, interest rates go up quickly, credit conditions deteriorate and we enter a recession. The stock market keeps going down until the first signs of change of behavior from the FED materialize which, would happen when inflation is under control again. This may happen by the end of 2022. In this case, this year may go into history almanacs as one of the worst years ever for the stock market.
What data is telling us?
Money velocity has slowed down which is anti-inflationary
Total money supply is already shrinking
Long term expectations for inflation are already cooling down
The economy is already slowing down
Credit conditions are still very healthy
See below these data points by yourself.
Money velocity and money supply shrinking (very anti-inflationary):
Long term inflation calming down:
Economy (GDP) slowing down:
Credit conditions are still healthy:
Capital expenditures are on the rise (=optimism)
The Nasdaq looks still ugly:
Bottom line:
For the very long term investor today is a good time to keep adding to great companies. As you should do every month.
For more short term investors (3-9 months type of investments), waiting for the market to take a more clear direction is the best course. You may lose a strong rebound, but you may also avoid further downside in the worst case scenario. You want to see the Nasdaq go above the 30 weeks moving average (red line) and for that several weeks will be needed.
-
Important:
this is not investment advice. Consult a licensed financial advisor before making any investment decision.
-