This article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA
In November, we wrote that Winter is Coming. In it, we detailed The Past, The Present, The Future and Action Items. Indeed, for much of the county, Winter has arrived… in spades.
Like our last post, we are not talking about the weather although it has really been something and not necessarily in a good way. The cold weather, snow and strong winds naturally brought along massive travel issues during the Holiday Season. However, beyond the winter storms and corresponding travel issues there is much more to unpack.
The Federal Reserve Board (The Fed) has been on a mission to fight inflation. The annual inflation rate in the U.S. for the trailing 12 months ending November 2022 is 7.1%. 1) Although inflation has cooled a little bit, it was recently running at 40-year highs. Repeat:
Inflation was recently running at 40 Year Highs.
The Fed’s primary response has been to raise interest rates. In December 2022, they raised the target federal funds rate range to 4.25%-4.50%. The most recent 50 basis is the seventh consecutive increase in interest rates and the highest since December 2007. 2) This was, of course, the month and year when the Great Recession of 2007-2009 kicked off. You know what happened then.
The Fed meets again in late January 2023. The meeting however does not wrap up until February 1, 2023. Therefore, there will be no interest rate increase in January 2023. Yeah!
Keep in mind, the Feds target for the inflation rate is 2%. With the rate currently running at over 7%:
The Fed has a long way to go and will keep raising rates to bring down inflation.
One of the issues of course is the folks just around the block from the Fed.
Our leaders, Congress, just keeps spending money like drunken sailors. The recently passed the $1.7 Trillion (with a T) Consolidated Appropriations Act of 2023. This of course has the opposite effect of what the Fed is trying to accomplish. Approving more borrowing will, in fact, push up inflation, not bring it down.
The impending recession, it we are not in it already, has to be the most talked about of all time. The official arbitrator for when recessions begin and end is the National Bureau of Economic Research (NBER). Whenever we get the word from them, we will likely have been in a recession for several months or more. Many small businesses and families are regrettably, in their own recession, or will be soon. The rising interest rates mentioned above will eventually, push the U.S. economy into a recession.
Please, check out Here are 6 Easy Ways to Navigate a Recession.
Rising interest rates have not been good for stocks. The Dow Jones Industrial Average (DOW) is down year to date (8.5%), in terms of stock indexes, they are the ‘winner.’ The Standard and Poor’s 500 Index (S&P 500) the broadest measure of the market is down (19.7%) and the Technology heavy NASDAQ is down (33.8%). 3) Yikes. Although not very surprising. The NASDAQ returns have been as follows:
It was time to take at least a step (or two) backwards….right?
It is hard not to envision even more steps backward for the Technology Sector.
Sam Bankman – Fried – AKA SBF
I am not even sure where to begin with this one. He deserves a post dedicated to just him. That however, is for another day.
SBF was the founder of FTX, a cryptocurrency exchange and Alameda Research a cryptocurrency trading firm that both recently filed for bankruptcy. Two former executives, Caroline Ellison and Gary Wang both pleaded guilty to fraud and other offenses. They have both agreed to cooperate with the government with the possibility of shorter sentences.
Things had been going swimming well for the 30-year-old MIT graduate. Living in the Bahamas, lobbying Congress and dressing, well… casual. Before things went sideways, his net worth peaked at $26 Billion (with a B). 4) He claims to have less than $100,000 in the bank now.
No worries, his parents posted his $250 million bond, one of the largest in U.S. history!
The new CEO, John Ray III, is starting to work the company through the Chapter 11 bankruptcy process. Mr. Ray guided Enron through this process in the early and mid-2000s. Enron’s $63.4 billion in assets made it the largest corporate bankruptcy under Chapter 11 at the time. 5)
Mr. Ray, in a filing with the U.S. bankruptcy court for the district of Delaware, said there was a “complete absence of trustworthy financial information.”
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray said. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.” 6)
That is from the guy that got Enron through bankruptcy.
This has of course, shaken the crypto market. The crypto market has lost over $2 trillion in 2022. 8)
A Spring Thaw
Will there be a Spring Thaw? As we say around here quite a bit:
Weather wise at least, historically speaking, we should have a Spring Thaw.
However, reading the tealeaves for things other than the weather, which is VERY dangerous, the answer, at this time, appears to be no. As is usually the case, the situation remains fluid. Under current conditions, it is exceptionally fluid.
The Feds two stated mandates are maximum employment, stable prices, and moderate long-term interest rates. They can check off the box for maximum employment. Mission accomplished. For now. Unemployment is very low. In November 2022, the unemployment rate is only 3.7%. 7) Therefore, currently, they only have one mandate, stable prices and moderate long-term interest rates.
Prices have been anything BUT Stable.
Actually, they have been stably high. If, in fact, you can find what you are looking for. The continuing rise in interest rates will eventually, work its way through the system and inflation will slowly come down.
- Batten down the hatches.
- Buckle up for more interest rate increases.
- Raise Cash.
- Risk Off.
- Wash, Rinse, Repeat.
- Usinflationcalculator.com /inflation
- Time.com – December 15, 2022
- Wall Street Journal – December 28, 2022
- En.wikipedia.org/wiki/Sam_Bankman – Fried
- Fortune.com – November 11, 2022
- CNBC.com – December 23, 2022
Any opinions are those of the author and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. The stock indexes mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.