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August 2022 Monthly Review

"It's the Economy, Stupid"

By Loyd Johnson, Chief Investment Officer
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Loyd Johnson PhotoA Look Back

The above title was a phrase coined by James Carville in 1992, when he was advising Bill Clinton in his successful run for the White House. The U.S. economy was experiencing a recession and the incumbent president, George H.W. Bush, was perceived as out of touch with the needs of ordinary Americans. Carville hammered campaign staffers to talk about the economy every chance they got. The phrase became a mantra for the Clinton campaign, and has turned into a catchphrase for analysts when talking about elections, markets and other current events. My memory was jarred when watching a documentary recently about the 1990’s, and the simplicity of the phrase holds true today when thinking about our economy and financial markets. We could easily substitute the word inflation for economy in the phrase and the meaning would be just as powerful. Inflation is as high as it’s been in over 40 years and businesses and individuals…and the Fed are feeling the pinch. From the Fed perspective, they have been aggressively raising the short-term Fed Funds rate in an effort to stem demand, and ultimately reel in inflation. Higher rates make it costlier for individuals and business owners to borrow, and capital expenditures and purchases can be delayed. For an investor, the higher rates provide an alternative for stock purchases. There can be little question that the zero-rate environment provided a significant boost to stock prices over the last several years as investors searched for yield and accepted the increased risk of stock ownership. As my dad used to tell me, that works until it doesn’t. And, so it goes…After an initial positive start to the month, August ended up turning into a month where market participants focused more on the economy and the words of a very “hawkish” Fed. The anticipation currently is that Fed will raise rates another .50-.75% at the next September meeting. Not surprisingly, stock indices did not fare particularly well, as the S&P 500 was down over 4% and International Developed markets were down a bit more. After bouncing back nicely over the last couple of months, core bonds retreated again and were -2.83% for the month, now negative by 10.75% for the first 8 months of the year. The exhale that we experienced with healthy returns across the board in July were unfortunately short-lived.

A Look Ahead

We are curious creatures by nature, and maybe especially so when it comes to investing. All kinds of research and technology are available to dissect the past, and many attempt to use…or manipulate this information to help them glean some indication of what is going to happen in the future. We believe the past is important too. Certain ole-time sayings have stood the test of time for a reason. “Don’t fight the tape” “Don’t fight the Fed” “Don’t be the last one in or out” We particularly like, “past over-performance leads to under-performance and vice-versa.” All of these have been true…and can be true. The difficulty is always knowing when they will be true. The great majority of the money that we manage for clients is longer-term growth objectives. We have the ability to counsel clients on the importance of maintaining a diversified, well-balanced, low-cost portfolio. Importantly, we take advantage of opportunities that markets give us…either way…to trim and reduce risk after strong returns, and to add and increase risk after market selloffs. We did just that and trimmed in early August after the outsized rally in July…It is what has stood the test of time. It is what has worked. We remain conservative in our allocation, with a bit more cash available to take advantage of opportunities going forward. Until then, “it’s the inflation, stupid” is the new mantra...