June 2022

By Arthur Swalley, CIMA® Partner

In April, we wrote about Short-Term Volatility vs. Long-Term Opportunity. Since that writing, we have certainly experienced the short-term volatility, with the S&P 500 index entering a bear market – down over -20% from its peak. What investors think of as safe havens were not, with the Barclay’s Aggregate Bond index down -13% so far in 2022. Cash holdings with almost no return are being eroded by an 8.6% inflation rate.

The Federal Reserve has embarked, finally and emphatically, on a campaign to bring the inflation rate under control. Short-term interest rates are being raised much more rapidly than previously signaled in quick response to the inflation data. With unemployment rates near historic lows, the Fed is now totally committed to taming inflation.

Whether these actions result in a recession remains to be seen, as the traditional economic signals for economic expansion and recession are mixed. The rapid speed of economic change, kicked off by the Covid-19 pandemic, has caused the traditional business cycle to speed up.  Where we would have once expected a multi-year recovery leading to an extended period of inflation pressure, we are now seeing these cycles play out over a period of months. Thus, the volatility of markets, inflation, and interest rates, has sped up and resulted in wider, faster market swings.

The stock market is certainly forecasting a slowdown in earnings growth, along with a reduction in valuations due to higher interest rates, causing higher corporate borrowing costs. The rapid reset of stock valuations provides opportunities for patient investors to assess new economic paradigms caused by this rapid change. The short-term volatile landscape is filled with uncertainty and doubt. What we don’t doubt is the vitality of the American economy and its ability to adjust and prosper over a long- term time horizon.  As we have experienced several times over the past three decades, during various business cycles, we are excited to search for opportunities when prices for dynamic businesses are low.