Since last Friday when Federal Reserve Chairman Powell got medieval on the markets the S&P 500 is down nearly 7% and the NASDAQ is down about 8.5%. For those who thought that the Fed would shrink from inflation fighting at the first sign of economic weakenss and either stop tightening or reverse course and start easing, were disabused of that notion in one terse 8 minutes speech from Powell.
I believe we are going to have a deep recession, perhaps worse than the Fed anticipates because they are underestimating the amount of leverage present in thousands of large and midsize private companies in the U.S. I wrote about that here Light a Match
Right now stocks are reacting to an increasingly aggressive Fed probably as they should. However, for stocks, an aggressive Fed provides a long term benefit. I read a very interesting article in Money Week by Barry Norris, founder of Argonaut Capital, titled, “Investors beware–the 1970s Nightmare is Back.”
Norris writes, “Contrary to the common myth, inflation hits those with capital surpluses–the few or the retired–worse than the many in the general working population. “
He then goes on to lay out what happened to investors in both the U.S. and U.K. equity markets in the 1970s in both nominal and real returns.
“The problem for financial markets in the 1970s was high and persistent losses in the purchasing power of fiat currency. Inflation in the U.S. was just 1% in 1964 but averaged more than 7% a year during the Seventies and peaked at 15% in 1980...If you were unlucky enough to buy the U.S. at its peak in 1973 you would still have made 21% over the next decade in nominal terms. But in real terms a loss of 48% for U.S. investors.”
If the Fed’s actions now keep us from the fate stocks suffered in the 1970s then I think now is a time to selectively add to stocks that you would want to own for the long term. I’ve been doing a bit every day since last Friday. I have also been adding 3-4 year lower investment-grade (BBB) corporate bonds at yields at or near 4.5%. I buy individual bonds to hold them to maturity in order to generate some income. This is different than investing in bond funds. In this environment bond funds are like poorly performing hedge funds.
Lastly, I am writing this little missive purely from an investor’s point of view, not a political or societal one. That is an important disctinction when it comes to inflation and monetary policy.
Me too. I love when crude goes down....they go down and I buy more.
I'm long energy.