The reversal of the bear market from mid-June to mid-August provided relief for many and hope that the worst was over. However, while the rally was pushing stocks towards positive territory, encouraging an increase in equity exposure, we remained increasingly concerned about the challenging monetary policy and economic backdrop as well as our stubbornly negative market indicators.
When is the bad news of inflation actually good news for investors? It's when an oncoming recession appears likely to push interest rates down and crush problematically high inflation. Recessions have a cleansing effect on inflation, debt, leverage, and excessive exuberance.
For much of the last 14 months, the economic headlines have been all about inflation and the 40-year highs we have been consistently seeing now for many months. What’s now starting to be seen and shown by recent earnings reports and forward guidance from retail giants Walmart and Target, is that an inventory bullwhip effect is taking place that will have a deflationary impact on certain consumer goods.
It’s been a challenging 2022 so far in the markets. In our latest situation report we outline what we’re watching and cases to be made for this bull market to continue, and cases to be made that we could be shifting to a bear market.
This market has been far more resilient than many investors ever thought possible. That suggests whatever craziness we have experienced can continue for some time. Fundamentals sometimes don’t seem to matter much in this environment. The viruses will likely recede; our government and economy are still running; companies will continue to earn profits under most conditions; and as the owners of those businesses, long term investors will continue to benefit.