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The definition of a bear market is pretty straight forward…a 20% drop over 2+ months from previous highs.  That is what we are in and there have been only 3 bear occurrences since 2000, with one of them lasting just 33 days (2020).  (Technically, the Nasdaq market has now entered bull market territory, having rebounded 20% higher than its recent low).  The idea of being in a recession appears to come with a bit more debate…is it two consecutive quarters of negative GDP growth, or a combination of negative growth, high inflation, and an increase in unemployment.  While we wait for the bureaucrats to argue the definition, let’s consider two things, one, once they label a recession, we are probably on our way out of it, and two, recessions should be viewed with respect to their level of magnitude.  With a strong jobs report and now a cooling of inflation from recent highs, the economy appears to be hanging in there.  If the recession remains mild, and inflation tempers, that could be the definition of a recovering stock market.

Today the Fed took another shot at inflation, raising interest rates by 75 basis points.  During the pandemic in 2020-21, and also the Great Recession of 2008-09, the playbook was to throw money at the problem by either keeping interest rates at zero percent or by literally giving people money to spend our way out of a jam.  The result of all the free money (trillions with a T) is the aggressive inflation which now needs to be addressed.  The multi-trillion dollar question then is…can the Fed raise rates enough to slow the economy without throwing us into a recession and/or a much steeper downward spiral in stocks.  The better question may be…are we fighting yesterday’s war and should we be putting our efforts towards freeing up the supply chains, loosening the grip of government controls on US businesses, and letting post-pandemic demand play itself out over a period of time.  The only thing that is transitory is any Talking Head taking responsibility for their economic calls.

Friday’s upcoming CPI report will unfortunately tell us the same story that we are living, that prices are higher and they are sticky at these levels.  Inflation can be an insidious threat to our economy, acting like a silent tax on our day to day life.  From our friends at 10-K Diver here are some pointers on dealing with inflation.  Be a consistent earner, meaning now is the time to be valued in order to maintain and increase your income streams.  Continue saving by being even more aware of what and how you are spending your money.  Finally, inflation proof your portfolio by investing in companies that have pricing power, very manageable debt loads, and are capital light.  Inflation is happening and will be working its way through the system for some time.

Yesterday, the White House again touted the fact that they have cut federal deficits by historic amounts the past two years.  Just keep in mind that the deduction is only in the predicted yearly deficit, in other words the national debt is still going up in historic fashion, but just not quite as fast.  In classic political double-speak, the Biden administration would have you believe that they were able to cut the deficit by $350 billion last year, but due to pandemic emergency spending running out, if they had done nothing, according to the Committee for a Responsible Federal Budget, the deficit growth would have slowed by $1 trillion, much more than what they are hanging their hat on.  Whether Republican or Democrat, unfortunately our elected leaders do not appear to have the resolve to tackle governmental spending and now we get to deal with the  effects of higher interest rates begotten from higher inflation.  The more you repeat something the more likely you are to believe it.

Markets are known to climb a “wall of worry” or go higher even though headlines and investor sentiment are logically negative.  The current bull market that we have been enjoying has been exceptional at climbing that wall.  From divisive political turmoil, including two impeachments, to a world-wide pandemic, the bull continued to scale the wall.  Now sadly comes Ukraine, and while stocks are lower for the year, and there is plenty of trepidation out there, the market continues to hang in there.  There is a man whose name begins with a P, who has put fear into stocks, and that is Fed Chairman Powell.  Higher interest rates could ultimately be worse for equites than other world events, at least we can hope for that in a way.  As for Russia, it is important to remember that they have fallen to become the 11th largest world economy and Russian stock exposure is very limited in most investments, excluding commodities like oil.  We profoundly hope that cooler heads prevail and that our main concern is designing portfolios to withstand and benefit from higher rates and/or higher inflation.