Whoopty Doo - Market Corrections - year 2022

“Whoopty Doo. But what does it all mean...”– Austin Powers (2)

I will get to this famous Austin Powers quote later in the newsletter. But if you remember my January newsletter, I emphasized how I expected a rockier market in 2022. Well, guess what? That’s what we have gotten so far. The market is currently in a correction, I believe it started about the second week of January.

Corrections are normal

In fact, there have been 26 market corrections since WWII but with an average decline of 13.7%. The average recovery time in a correction is about three months.

The market is resetting itself for the future, interest rate hikes are coming, and the Fed is going to be shrinking its balance sheet. In English, this means the Fed is no longer going to be pumping trillions of dollars into the system while the government is handing out trillions of dollars of free money.

In 2021, with all this money flowing through the system and people spending it, it provided a tailwind for the economy. Think back, a lot of the people have been locked down for a year or two, and they were itching to get out and spend their money. People were bidding up the prices of homes as well as the prices of cars.

Unfortunately, now the party's over with.

Inflation is running hot, and I mean it is sizzling.

As a sidebar, if you discuss inflation was somebody under the age of 45 or so you might receive a blank stare because we have not had high inflation since the late ’70s. Well, for Millennials and Generation Z, school is in session. What is inflation? In a nutshell, inflation is when you're driving to work in the morning and you have half a tank of gas, but you feel like you need to fill up now because gas prices will be up later in the day.

"If it looks like a duck, walks like a duck and quacks like a duck, it's probably a duck”. - Albert Einstein.

Yes, I know Albert Einstein did not say this, but I may be going out on a limb here but some of the indicators are flashing recession in 2023.

Indicators:

• Billionaire bond investor Jeffrey Gundlach said, “Consumer Sentiment plunged on Friday to a fresh decade low, and that’s been a reliable leading indicator as to where the economy is headed in the future.” (1)

Normally when people have a bad feeling about the economy, they tend to not spend as much money.

• James Ballard of the Federal Reserve said on Valentine's Day, “I do think we need to front-load more of our

planned removal of accommodation than we would have previously...”(3) He supports raising interest rates by a full percentage point by the start of July and it appears he also wants to have 3-5 others this year.

• Bullard’s plan involves spreading the increases over three meetings, shrinking the Fed’s balance sheet starting in the second quarter, and then deciding on the path of rates in the second half based on updated data. (3)
• No more free government money will be passed out this year.
• The 10-year Treasury yield from January went from 1.5 to over 2% in one month.

The reason I see a recession in 2023 is because the Fed is going to be raising rates very aggressively. It has been my experience over the years that it takes eight or nine rate rises to really shut off demand. For example, do you think many homeowners today that are sitting in a house paying a 3% mortgage would move across town if the new mortgage rate was 6%?