Interest rates continue to be the the proxy for everything: the fed, inflation, the stock market and the “recession.” As you can see in the following chart, the market’s latest pullback (green line) began shortly after the 10-year treasury rate ticked higher. And with rates significantly higher this year—stocks are still significantly lower.
Interest rates (e.g. treasury yields) are the metric stocks inversely follow when the economy gets choppy. Furthermore, the 10-year treasury yield remains inverted versus the 2-year (historically a strong recession indicator).
But so what!? Stocks are already down, what should you be doing going forward?
We firmly believe this “recession” is driven by interest rates more than anything else, and interest rates are largely controlled by the US Fed. And since the US fed’s dual mandate is to care about inflation and employment (NOT the stock market)—the stock market continues to be the main casualty of their policies.
Going forward the key to the market will be employment and inflation. And since unemployment remains relatively low, it’s all about inflation.
The latest monthly CPI and PPI numbers ticked lower—a good sign for stocks (because it means the Fed can start to lighten up), but they are still high. Importantly however, the fed’s interest rate hikes do impact stocks in the immediate-term, but they generally don’t impact the actual economy for 6 to 18 months later. What that means is the fed may easily OVERSHOOT with its aggressive interest rate hikes, and we may not know until sometime in 2023!
The bad news is that in the short-term the market may feel more interest rate volatility pain. The good news is that in the long-term inflation will slow and when the fed finally stops being so aggressive, stocks will likely soar.
If you are a short-term investor this uncertainty can be challenging. But if you are a long-term investor you should embrace this year’s sell off as an opportunity to invest at lower prices. The market is eventually going higher. And despite all the fear mongering headlines and news flow—NOW is a great time to be a long-term investor.
It’s worth repeating: don’t panic and make rash decisions. Disciplined long-term investing is a winning strategy.