Economic Uncertainty Returns
Capital markets and economic conditions have changed dramatically since the end of last year. Inflation expectations have risen. Consumer confidence is down sharply, dropping more than 16% from this time last year. The Consumer Expectations Index dropped to a twelve-year low. Labor market expectations have dropped to their lowest levels since 2009. Stocks, as measured by the S&P 500, hit correction territory in March, down 10% from their peak. Stocks ended the first quarter in negative territory year to date. The bond market produced small gains for the quarter.
As investors, we can classify our largest concerns into three categories:
1. Economic growth. We will be keeping a close eye on GDP numbers for the first quarter. Many economists are predicting negative GDP for the quarter, with some predicting a large drop. Others are calling for GDP growth, but most have lowered their expectations.
2. Inflation. As we learned in 2022, nothing can spook investors quite like inflation can. After dropping steadily through 2023 and 2024, we are seeing inflation numbers rise again. The data is unclear on this, but the Federal Reserve is unlikely to lower interest rates as long as inflation is above their target.
3. Equity market valuations. Even with the drop in stock prices, stock valuations, relative to earnings, are extremely high. By itself, this would limit market upside, but when combined with broader economic issues, this is a real concern.
Given the confluence of issues, it is difficult to forecast what will happen for the remainder of this year. A recession is possible, but by no means a certainty. The same can be said for inflation. Some analysts are calling for the possibility of stagflation, which is a recession and inflation at the same time. This is very unusual (think 1970’s), and we think it is unlikely, but not impossible. We have seen higher volatility across all economic areas, and that seems likely to continue. The capital markets will also likely stay volatile for the foreseeable future. The Fed has been diligent about keeping on the path of price stability, but monetary policy can’t fix mistakes in fiscal policy.
As investors, it is important to acknowledge that we can’t predict what the markets will do on a short-term basis. Bad news and high volatility are unnerving, and the tendency is to want to do something in response. The reality is that making major changes in a portfolio in the middle of a rough patch almost always leads to worse results. We have tried to position our portfolios to account for an uncertain economy, but volatility will, by the nature of investing, remain.
As always, please call us for our thoughts on your portfolio and to review your objectives.
Wabash Capital
