MONEY MATTERS

2022 Market Predictions Update

In February, I said I would prefer to focus on facts instead of making predictions. Some of those facts included n Interest rates were still low but likely rising; n Inflation was the highest it had been since the late 1970s/ early 1980s; n Unemployment was very low, and anyone who wanted a job could typically find one; n Consumer balance sheets were strong with lots of cash in the bank; n Corporate profits had risen and were still rising with S&P 500 profits in 2021 at all-time highs; and n China and Russia were dominating the news with Taiwan and Ukraine.

Fast forward to today, and for the most part, the same headlines and trends dominate markets.

Back in February, I was cautious on bonds due to rising rates and the potential for much larger rate increases. With the rate increases that have come, bonds in general have had a tough year. In fact, they have had one of their worst years on record. Keep in mind that if you own individual bonds, you may be seeing a loss from a performance standpoint, but if you hold the bond to maturity, that performance number could change drastically for the good. Bonds are marked to market based on current interest rates. For the first time in quite some time, bonds are becoming more attractive with recent interest rate increases.

Inflation is still uncomfortably high. The news is still dominated by inflation and the effects of it. This is what is driving the consistent rate increases by the Fed. Also, the soft landing you are hearing about in the news is directly tied to inflation and the ability of the Fed to raise rates, bringing down inflation and doing so without pulling the economy into a recession.

Just recently, news came out about us having two consecutive quarters of negative GDP. Are we in a recession? I’m not sure to be honest. Historically, recessions have consistent characteristics, like high unemployment, which we don’t have right now. It will take some time to know if we officially are in a recession, which will be determined ultimately by the National Bureau of Economic Research.

Consumer balance sheets are still generally holding up well, but there are signs of stress. Right now, there are cracks forming in the sub-prime market. Given the high inflation rate, which has been ongoing for some time now, the lower earners who make up most of the sub-prime market are beginning to have a hard time making payments. Interest rates for these consumers are very high, and coupled with high inflation, it’s easy to understand how they may have a harder time.

Corporate profits for the second quarter of 2022 are rolling in now. A lot of companies are reporting better numbers than the market was pricing a month ago, and companies are giving decent guidance for the third quarter. Keep in mind that the market is forward looking, and as Benjamin Graham is famous for saying, “The market in the short run is a voting machine but in the long run is a weighing machine.” What this means is don’t put too much emphasis on short term earnings/results. There will be good quarters and also bad quarters. Focus more on the long-term characteristics of the business, which will give you a better understanding of how well your returns are likely to be over time. China and Russia still dominate the news with another addition in Taiwan. The U.S., China and Taiwan have bickered amongst one another over Taiwan’s independence for quite some time. I believe the U.S.’s interest in Taiwan today is more elevated and has more to do with arguably one of the top few most important companies on the planet, TSMC (Taiwan Semiconductor). Semiconductors are imbedded into our daily lives and, in my

MONEY mind, are new age infrastructure. They are a key component of the digital highway. Right now, phones, TVs and other digital MATTERS products dominate the supply for them, but moving forward, automobiles will become a dominant player in the industry, too. For these reasons, Taiwan is now more important than ever, due to the majority of TSMC’s operations being located there. A disruption of this company could be far worse than a war between Russia and Ukraine. What does all of this mean? There are significant risks today, and there will be significant risks in the future, including how long inflation will stay elevated; how many more rate hikes the Fed puts in place; and when Russia and Ukraine find peace. Bottom line: It’s unknowable; as much as people like to talk and think they may know something, most don’t.

Lee Williams I don’t have definitive answers for these questions; however, I do know that there is always uncertainty. Each set of circumstances has the same motto of “This time is different, and there is more risk.” Looking back through time, regardless of the then-current risks, capitalism has a way of working through the issues. As I’ve said repeatedly in the past, the United States and the world in general have a long track record of becoming more efficient, and businesses have historically done a great job of adapting, evolving and carrying on. Times like today is when a plan carries its weight. When everything is going well, no one worries too much. As stress enters the picture, doubts arise. The plan in place is what keeps you on track and protects you from making irrational decisions. If you don’t have a plan, get one.

~ Lee Williams offers products and services using the following business names: Nowlin and Associates – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments | The Ascent Group, LLC – investment advisory services. AIC is not affiliated with Nowlin and Associates or The Ascent Group, LLC.