Aaron Tuttle, CFA®, CFP®, CLU®, ChFC
GWS Chief Investment Officer
Are we on the verge of a recession? That seems to be the number one question on all investors’ minds. In this quarterly market summary, we’ll take a deep dive into this and other key market themes from Q1 2022. As always, we’re here to give you actionable advice so you can make informed decisions with your money.
Theme #1: Recession Signals Historically, one of the most accurate predictors of a coming recession has been an inverted yield curve — exactly what we’re experiencing in the market today. Typically, the yield curve is upward sloping. When it inverts, it signifies that short-term debt vehicles have higher yields than similar long-term instruments. As we always take care to mention, no one has a crystal ball to know what the market will do. Still, having kept an eye on the yield curve and other economic factors, our investment committee anticipates we are approximately six months out from a recession.
Theme #2: Markets Moving Past Headlines Given the Ukraine-Russia war, it’s easy to blame Russia for inflation. In reality, monetary policy, lockdowns, and other government policies laid the groundwork for inflation long before the war. Inflation will continue on as supply chains become less global and more regional. The markets are already moving past their initial reaction to the Ukraine-Russia War (even if the headlines have not). Instead, markets seem to be reacting more acutely to changes in Federal policy.
Theme #3: Low Unemployment
We’ve seen strong unemployment numbers in the last few weeks. Even if we have a recession, we could see unemployment staying low. Real wages are likely to drop through this, and companies will be more hesitant than before when it comes to letting people go. Instead of seeing more employees laid off, we anticipate a rise in the cost of energy, food, and other consumable goods.
So, What Does This Mean for My Portfolio?
Many clients have asked, “If we’re heading into a recession, should I pull out of the market now and go to cash?”
Our answer is: Not necessarily. There is still value to be had in equities, and completely pulling out causes you to miss the chance for those potential gains. Plus, with high inflation, you also risk losing your principal if it’s not growing at all.
The market typically peaks 13 months after an inverted yield curve happens. So, we need to be more diligent and ready to move on things. It makes more sense to look at more defensive equities than to complete sidestep into cash.
Conclusion
From an inverted yield curve to the Ukraine-Russia war and unemployment metrics, there’s plenty to keep an eye on as we head into Q2. We don’t anticipate that the recession will hit this quarter; however, it’s prudent to be prepared and review your portfolio strategy with your advisor if you have any questions.
Our Commitment
As always, the GWS Investment Committee is committed to the following investment management goals for our clients in 2022:
To pursue long-term returns that first and foremost strive to help clients work toward all goals in their financial plans.
2. To seek excess return above each portfolio’s benchmark over a three-year trailing time period and a full market cycle, in order to hopefully cover client fees and add surplus to their portfolios.
3. To implement investment strategies that align with each client’s personal volatility and benchmark sensitivity to help them remain confidently invested and long- term focused. We’ll continue to provide updates on these and other market happenings, so be sure to subscribe to our YouTube channel so you never miss a Weekly Market Insight webinar (Wednesdays at 3:30 p.m. CT). We’ll see you there! --
Disclosures
The opinions expressed are those of Aaron Tuttle and Gatewood Wealth Solutions as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material is for general information only. This material does not constitute investment advice and is not intended to endorse any specific investment or security.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested directly. Returns represent past performance, are not a guarantee of future performance, and do not indicate any specific investment. Diversification and strategic asset allocation to not assure a profit or protect against loss.
When interest rates rise with fixed income securities and bonds, bond prices usually fall, because an investor may earn higher yield with another bond. Moreover, the longer the maturity of a bond, the greater the risk. When interest rates are at low levels, there is a risk that a significant rise in interest rates can occur in a short period of time and cause losses to the market value of any bonds that you own. The bond’s issuer is obligated to return the investor’s principal (original investment). As a result, high-yield bonds present greater credit risk than bonds of higher quality. Bond investors should carefully consider interest rate risk, credit risk, liquidity risk, securities lending risk, repurchase, and reverse repurchase transaction risk.