Some Harsh Truths About The Economy, The Market, And What You Should Do Now…
Most people have no idea of the kind of trouble that’s brewing in our economy. And by the time they realize the full extent of what’s going on, it will be too late.
Let me explain…
Ask the average person on the street, and I’m willing to bet that they aren’t overly optimistic right now. But they don’t have the full picture, just bits and pieces.
With each passing month, more and more people are beginning to notice that their credit card bills are a bit higher and their savings accounts are shrinking. Don’t believe me?
Just look at the latest data from the Federal Reserve. Revolving credit, which mostly includes credit card balances, grew at an annualized rate of 19.6% and totaled more than $1.103 trillion in April — a record. That breaks the pre-pandemic record of $1.1 trillion.
The personal savings rate dropped to 4.4% in April, the latest data available. That’s the lowest rate recorded since September 2008. That’s down drastically from the record-breaking 33.8% in April 2020, at the height of the Covid-19 lockdowns.
Of course, the low savings rate (and high credit card debt) can be partially attributed to things like families going on vacations that were planned two years ago. Unfortunately, those vacations probably got a tad more expensive thanks to surging prices.
I Warned About The “Temporary Prosperity” Of Inflation
Exactly one year ago, I warned about the effects inflation would have in an update issue of my premium service, Capital Wealth Letter.
In that issue, I cited Earnest Hemingway, who wrote that:
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”
I put a special emphasis on that “temporary prosperity” part. Because back then, people were feeling pretty good about their finances. All of that money printing and “stimmy checks” back then were making people feel pretty good. But I warned that it wasn’t meant to last.
While checking, savings, and trading accounts were growing fatter, I said that people would soon realize the things they’d always yearned for if they just had a little more money — houses, boats, cars, etc. — were still just out of reach.
How did I know this? Because inflation almost always heats up faster than we expect, and the Fed usually reacts slower than they need to.
Fast-forward to one year later. Home prices have soared. If you can even find a vehicle to buy, they’re outrageously expensive. The average price of gas has topped $5 a gallon – an all-time high. And when you go to the local grocery store, the bill at the register for the same amount of goods has increased drastically, too.
To combat the runaway inflation, the Federal Reserve has ratcheted up interest rates – announcing a 75-basis point hike on Wednesday, June 15. It was the biggest increase since 1994. Although that’s probably too little, too late (as I said, the Fed historically doesn’t act quick enough in these situations).
Still, higher rates have already impacted what it costs to buy a house. Mortgage rates have topped 6%. Higher interest rates will likely cool soaring home prices, but those gains will largely be locked in, making it even more unaffordable to buy a house.
For instance, if someone could afford the monthly payment of a $450,000 home at a 3% interest rate, the equivalent payment at a 6% interest rate will now only get you a $316,000 home. That’s quite the haircut…
The Last Economic Leg…
When news of first-quarter GDP came in lower than anticipated (-1.4%), economic optimists pointed toward the strong consumer spending report as a key reason why the economy was doing fine.
I cast doubt on this reasoning in an interview with my colleague, Brad Briggs. Among other reasons, I pointed to slowing sales growth at Amazon, the nation’s No. 1 online retailer.
Of course, as the earnings season unfolded, many retailers pointed toward weakening consumer spending. And all of a sudden, these very companies are packed with inventory they can’t get rid of, as consumer spending has slowed drastically.
It’s clear that the economy’s growth engine – consumer spending – is hitting a snag, and investors are getting worried.
The last stronghold of the economy is the low unemployment rate of 3.6%. But even that’s beginning to show cracks…
Companies like Wells Fargo, Meta Platforms (Facebook), and Twitter have all implemented hiring freezes. The real estate platform Redfin announced this week it would slash 8% of its workforce (roughly 470 people). Compass, another real estate firm, is laying off roughly 10% of its workforce, or about 450 people.
Pandemic darling Peloton is laying off 2,800. Coinbase, the cryptocurrency exchange, is letting go of nearly a fifth of its workforce. Even Tesla CEO Elon Musk sent an email to employees announcing plans to shave 10% of salaried workers.
Just in the last two weeks, more than 70 companies have announced layoffs.
Folks, it’s not looking pretty out there…
Searching For The Bottom — And A Plan Of Action…
It doesn’t matter how many bear markets a person has gone through, they are always unsettling. But here’s the thing… we can’t panic. We can’t let fear grip us and control our choices and behavior.
For most, it will, and they’ll throw in the towel and sell all their stocks at precisely the wrong time.
We don’t know when the exact bottom will hit. But for a little guidance, we can lean on what’s happened in previous bear markets and major pullbacks.
For example, in 2015-2016 the market fell over 15%. The S&P 500 bottomed at around a 13-14x forward P/E. That’s also the same multiple it bottomed at during the near-20% collapse in 2018, as well as the Covid-19-induced bear market in 2020.
Today, the S&P 500’s forward P/E is around 17 as I write this.
Analysts expect the S&P 500 to generate earnings per share (EPS) of $229.35 for 2022 (representing a 10% year-over-year growth). Keep in mind, that’s the current estimate, which means it could go lower. If we use the historical multiple of 14x on $229.35 that gives us roughly 3,210 on the S&P 500.
That suggests the S&P 500 could fall another 13% from recent levels.
But keep in mind that the EPS estimate is just that… an estimate. If it doesn’t materialize due to a weaker than expected economy, then the market could go even lower. Another thing to keep in mind is that at the bottom of the 2008 bear market, the S&P’s forward P/E ratio was 8.5.
The bottom line is that it is highly likely that this bear market isn’t over yet.
That means, right now, you should be socking away cash. Yes, I know that inflation is eroding the value of the dollar. But stockpile some cash today so that you can deploy it back into the market later… with the goal of getting a return that more than makes up for any value lost by holding it.
Build that shopping list of some of your favorite stocks that you’ve been waiting years for to buy at a steep discount. Remember, some of those stocks can be holdings that are already in your portfolio.
Finally, hold steady. Just like all previous bear markets and/or recessions, this too shall pass.
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