Talisman Talk


June 03, 2022

Along for the Ride: Or How I Learned to Stop Worrying and Love the Market, Part 3 of 3

By Jennifer Kirby, Managing Partner, Senior Wealth Advisor |
"1964 ... 'Dr. Strangelove'" by x-ray delta one is licensed under CC BY-NC-SA 2.0

Part 3 of a 3-part series

Despite all the good it did, the dangers of government economic stimulus are manifest today. Let there be no doubt—we are in a pivotal moment.

The last decade-plus of deeper government involvement in the economy has fueled wealth disparity and income inequality not seen since the Roaring ‘20s. We are politically and civically out of balance, evidenced by our fractured politics and sclerotic institutions. We are drawn to extremism across both major political parties, and there is growing populism and increasing social unrest.

Economically, the dangers of stimulus are coming home to roost. Much like in the 1970s, it is becoming clear that the ways in which government is spending are not solving the problem of inflation. Add to that a collective mindset of pessimism as global issues grind on, and certain overvalued sectors fall apart and drag the greater market with them. Speculation is taking a back seat. Borrowing is getting more expensive. This is ushering in a phase of deleveraging—reducing debt by selling assets.

So, Jerome Powell, current Fed Chairman, is looking at the landscape and deciding… do I want to be remembered as the guy who allowed inflation to go crazy and wreck the economy, or do I want to be the Son of Volker? The choice is clear—the Fed has started raising interest rates and tapering stimulus to stamp out inflation. Jerry has promised more rate hikes to come, and soon.

So, to answer the question of why the market is dropping like a stone… it is facing a triple-whammy. Interest rate hikes are disliked by the market in general—cheap borrowing is gone; the party is over. So that means a selloff. Some economic data and earnings reports are not where we’d like them to be. Selloff.  And probably the most important factor of all: investors and the public at large are experiencing a loss of confidence in the strength of our economy. BIG selloff.

I won’t lie—it is unclear where we are in this cycle, but it feels early.  The bears are only now poking out their heads from their caves.


What are possible solutions?

Ultimately, time will resolve the current market situation. Other than that, there is no silver bullet, or it would have been fired already. But there are some things that could help:

·         An optimistic tone from the current administration and the Fed would be a start. Much of the market is driven by public sentiment and we are in desperate need of a change in attitude.

·         Perhaps more surgical rate hikes. Too much is like chemo—it can be worse than the disease and kill an already delicate patient—much like in Volker’s day, it could trigger a recession. Jerry is not facing double-digit inflation like Volker was, so the interventions likely need a lighter touch.

·         Maybe curtailing certain tariffs and encouraging trade.

·         At the risk of wading into politics, part of the solution could involve selective, strategic “good” government spending in research and development to enable innovation (think military investments of the 1960s that created the Internet), or some infrastructure spending. The investments would be designed to create a multiplier effect which benefits everyone.

·         Stolen from Volker: “Corporate loopholes exist because someone wants them to.” So how about we close those? 

Both major political parties will attempt to blame each other for what is happening. Don’t fall for the hype. Volker and Powell notwithstanding, history also shows us that sometimes what we try to do has the opposite effect. Sometimes it is a question of luck and timing. No single administration has the lock on the broader economic cycle. They are playing defense in the game they are in. Some games are worse than others.

Will Jerry Powell be the hero that Volker was? Will he have the guts to do what it takes to subdue inflation without driving the economy into a recession? Are there more shocks on the horizon? Will the administration enact productive, stimulating policies? Will Putin’s adventurism be crushed, and the current trend of global despots recede?


Fortune Favors the Bold

Eventually we see the other side of these things. Markets get reset and investors come back in when the prices are perceived to be fair. Sentiment changes. People start to feel better as good news ticks up. New technologies and ideas emerge as others decline.  We are always moving towards the Next Big Thing. If there is a world, there will always be markets.

So, hunker down, you are along for the ride. Be brave—rash behavior is not your friend. Instead of panicking, close the statement, stop reading the headlines, and take a breath. If you feel like you need help, this would be the moment to consider a financial advisor who can take the emotion out of financial decisions. Think about your needs first—your cash reserves, your short-term goals, and other immediate financial obligations. Then look further out. Map a plan. Align the investments to the plan. Note I mention investments last. This is deliberate. Investments do not drive what you do now, your needs do. Investments can then be made to suit those needs.

And if you are not sure how to start this process, contact us.

No matter what Jerry Powell does, no matter who is President, no matter if Ukraine drags on—being thoughtful and deliberate about your financial situation keeps you prepared for any market.

Special thanks to Dr. Milton Friedman, John Maynard Keynes, Paul Volker, Dr. Farrokh Langdana of Rutgers School of Business, and countless others for shaping my knowledge of the field of macroeconomics.