Is This What Capitulation Feels Like???

Capitulation means “to surrender or give up” when it comes to investing. I’m not sure how close we are to the low point of this market correction for the S&P 500 and bear market for Nasdaq, or just maybe we hit it already. We never know until time passes and we look back. I do know it feels uncomfortable, as most volatile times do, so what should investors do?

Over the past 40 calendar years, stocks have swung from high-to-low, peak-to-trough, -14% year in and year out, and so far, we are below the normal volatility. No matter what events have swayed the markets through time, they have always recovered and gone on to make new all-time highs, and guess what, the world hasn’t ended yet.

There is a lot of bad news built into this stock market and the never-ending headlines are gut-wrenching; Russia invading Ukraine, inflation at 8.5%, the Fed advertising their aggressive campaign of hiking interest rates to stave off inflation, and Covid lingering on. The broad stock market has had six weeks of losses, but as we saw on Wednesday all it takes is a little good news for the markets to rebound, so there is hope.

The fundamentals are good; company earnings are positive, the economy is growing, we are adding workers to the payrolls and wages are growing. The other side is that consumers aren’t feeling as good because even though they are taking home more money, they are spending more at the gas pumps, grocery stores, and utility bills.

Friday’s Jobs Report showed the US added 428,000 jobs and the unemployment rate held steady at 3.6%. There are almost 6 million Americans unemployed but over 11 million jobs are unfilled. For anyone who wants a job, there is one available, and this fact alone may help keep the US economy from slipping too much.

Let’s talk about the “R” word, recession. The Fed raises the Fed Funds rate to cool down an economy that is growing too fast, kind of like tapping your foot on the brakes to slow down the car. Inflation is at 40-year highs which is why Jerome Powell came out and said that there will be a total of seven hikes in 2022. A month ago, rates went up 0.25%, and this past Wednesday 0.50%.

Hopefully, the Fed can raise rates just enough without pushing us into a recession, ever so gently so we have a soft landing. If they slammed their foot on the brakes too much, the car comes to a screeching halt and we bump our heads, and this is why the markets rallied on Wednesday when the Fed said how they have no intention of hiking rates by a walloping 0.75% and keep it to 0.50% for the foreseeable future.

I believe the Fed was late in fighting off inflation. It was just a year ago that they said inflation was temporary and transitory, but then again, they have chauffeured driven car service so they don’t pump their own gas. They also don’t shop for groceries or pay their utility bills, in hindsight they were out of touch with reality. I’m rooting for them to massage rates so that the economy continues to grow, and we come out of this in a good way. Inflation is a moving target so if we get it under control sooner than later, they may not have to raise rates as much and the markets should rejoice.

Investors only lose money when they sell and realize actual losses. Otherwise, they have paper losses and if they wait long enough for the markets to recover, their paper losses disappear. The hard part about selling because of emotions is when to buy back in. The easy money is when the markets rally with good news from a correction and/or bear market. Let me remind you about Covid-19 when the markets crashed (34%) in a few short weeks and we had the shortest recession in history, before we knew it, stocks recovered, and the economy was roaring.

Stay well,

Steve