Instead Of Market Fear, Let’s Try Some Historical Perspective

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The New York Times warns, “Wall Street Is Battered by Rising Fear About the Economy.” Or you could read the Wall Street Journal’s relatively upbeat, “U.S. Stock Futures Slide After Worst Month Since 2020.”

Stocks are roiling, according to the money people. As the Journal article noted, “’It’s a market that is jittery and nervous’” said Sebastien Galy, a macro strategist at Nordea Asset Management. ‘It has been fed liquidity for a long time and this has been built into expectations for stocks,’ he said, a situation that is now changing as central banks tighten monetary policy.”

There is a shift of mind that happens when people look at the relatively short term. There are advantages to living in the hear-and-now, but disadvantages as well. Every crest seems higher, every trough lower, because points of greater references disappear. People become transfixed on each shift rather than looking at the larger path, like getting rattled during a hike by a minor stretch of ascent that requires an occasional hand grip when the path before and after had been gentle.

Despite a slightly disturbed and even at times panicked tone, things are not so dire in the stock market. Yes, things are moving about in the economy, in complex ways. GDP was down in the first quarter according to the Bureau of Economic Advisors initial estimate. Here’s the short BEA explanation:

“The decrease in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment increased.”

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Some of this was to be expected. Government spending is way down as the heavy rescue spending for Covid was gone. Much of that is hard to see, according to a fuller explanation “because the impacts are generally embedded in source data and cannot be separately identified.”

Imports increased, very possibly because a normal availability of goods from overseas had plummeted and there was going to be a catch-up period to start rectifying supply chain problems that have heavily contributed to inflation. The graph of BEA import data below from the Federal Reserve Bank of St. Louis shows the pattern by quarter through the end of 2021, as full Q1 data for 2022 isn’t yet available.

IMPORT GRAPH

Expenditures and investments were up, but then so was inflation, meaning dollar-based measurements reflect an increase that is probably largely an effect of increased prices.

Still, let’s put GDP in a bigger pre-/post-pandemic context. “Real GDP for the first quarter of 2022 is 2.8 percent above the level of real GDP for the fourth quarter of 2019,” which was the last pre-pandemic quarter, according to the BEA. The country has recovered ground and is still on a path of expansion from those previous trends.

Monetary policy is getting tighter. Investors don’t like that because high liquidity and low interest rates mean more profit for them. Understood, and too bad. The concept of a monetary policy in place to easy the wealth gathering of those already far beyond comfort is madness. Interest rates have been ridiculously low for 15 years. Time for them to regain a sense of normality and perspective.

A look at stock movement will give some of that perspective. Here are graphs from January 1, 2015 and on for the S&P 500, Dow Jones Industrial Average, and Nasdaq, in that order.

S&P graph

DJIA graph

Nasdaq

There are ups and sometimes enormous downs, like during the pandemic crash, shown by the grey bars. Or like every major fall that happened in the past. The markets always eventually recover. That doesn’t mean hanging on is always wise. If you need cash very soon for whatever major life event, maybe selling makes sense. But for most people, ignore the drumbeats of panic and keep the money in your investments until you really need it. Even if growth is slow, it’s better than what you’ll get in a traditional savings account.

As LPL Financial mentioned in a note, the supposedly normally worst six months a year—the “sell in May and go away” until fall advice—is not necessarily sound.

“First, the S&P 500 Index has closed higher during the month of May in eight of the past nine years—so “Sell in June” might be more appropriate,” writes the firm’s chief market strategist, Ryan Detrick. “In fact, stocks gained nine of the past 10 years during these six months … [so while] our guard is up for some potential seasonal weakness and choppy action, be aware it could be short-lived and consider using it as a buying opportunity.”

Finally, consumer spending continues (although higher spending might be an issue of inflation), and the economy is still growing, led by corporate earnings, the firm notes.