Rainbows and Facts
I visited my sister Ellen and her family in Vermont this week. My niece and nephew are currently about 1.5 and 3 years old, respectively. From the baby, I heard lots of exclamations on repeat; “Bwe Bwe (her blanket)!” “Here you go!” and “Apple!” The 3-year old currently lives in a world of discovering and stating facts; “I really want dessert,” “There are no tractors on my pants, only other machines,” and “This is a carrot” are a few good facts I learned last week. Part of his learning also entails him asking every 3-year-old’s favorite question about 600 times a day, “Why?”
It rained one afternoon, and he stated “I think there’s going to be a rainbow.” When I said I didn’t think so, I anticipated the inevitable “why?” and had my follow up response ready. I told him because rainbows require two parts, rain and sunshine, and there wasn’t any sunshine to light up the rain and make a pretty rainbow. That about maxes out my ability to explain physics to a toddler.
There have been a lot of negative headlines lately about the state of the economy. Storm clouds gathering, if you will. Inflation is high. Russia’s invasion of Ukraine has put pressure on several key markets, including energy and commodities. COVID shutdowns are still happening in China, hampering the already-slowed supply chain.
The biggest grey cloud of late? Our recent preliminary Q2 GDP report came in slightly negative. Does that mean we are in a recession? The National Bureau of Economic Research (NBER) is the body who officially says whether or not we are in a recession. NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” By that definition, strong labor markets, an improving service sector, and strong durable goods orders indicate we are not in a recession, but as the ripple effects of the last 2 years continue, it’s possible we enter one in the next few years.
Doug Drabik, Raymond James’ Senior Strategist for Fixed Income, stated several encouraging facts in his weekly commentary this week. Fact 1: there is a lot of uncertainty in the market right now. For every argument on one side, there is someone on the other side who believes the opposite. This creates volatility, as expected. Fact 2: Recessions happen at the end of market cycles. Remember that markets are cyclical, and these cycles are healthy for long-term investors. Fact 3: 100% of the time in the history of current markets, recessions have been followed by periods of expansion. That recovery is typically longer and more fruitful than the recession.
The rain feels like it has started. There are many grey clouds above us. But just like a rainbow, markets require two things - periods of expansion and periods of contraction. Doug said it well in his weekly commentary: “I implore you to not waste your energy proving or disproving a label and instead focus on a plan.” Our team will help you through the rainy days by sticking to your planned investment discipline and the asset allocation that is right for you, and we will use this contraction period to find opportunities to help upgrade the quality of your portfolio where we can. When the light starts shining through the rain clouds, perhaps we’ll see a rainbow.
Grace Loveland August 5, 2022
Any opinions are those of Grace Loveland and not necessarily those of Raymond James.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
