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Market Strategy 6/21/2022

  • John Stoltzfus
  • June 21, 2022

Life Without “Free Money”

It’s not the end of the world despite markets that have “lost their lunch”

Key Takeaways

  • In this holiday-abridged week investors are likely to focus on clues as to whether or not the markets have already hit bottom.
  • As of last Friday the energy sector of the S&P 500 had declined 20.44% (into bear market territory) from its recent high for the year on June 8. The price of West Texas Intermediate oil in the same period fell just 10.28%—or just half that much.
  • Last week’s economic data showed a surprise slowing in both retail sales and the leading economic index, suggesting that US economic growth may already be cooling. 
financial chart graphic

At the core of the markets’ recent turbulence may be a generation gap between those who have never experienced inflation in their lives up to now (lucky them) and older adults (like some of us) who came of age through the 1970s, 80s and 90s. The latter came to know from living through it that higher inflation actually does not always deter stock prices from moving higher; nor does it necessarily curtail profitability, revenue growth or even innovation at the corporate level. The US economy even experienced a rise in the standard of living during periods of inflation due largely to advances in technology, health care and responsibly-deployed social safety nets.

Perhaps we have gotten spoiled in nearly 40 years of relatively low interest rates. Those rates were driven down by secular trends of technology and globalization that are deeply embedded in the global economy (in the lives of both business and consumers) and are inherently deflationary (offering offsets to inflation). In our view, these remain in place even as supply chain dysfunction persists and is aggravated by zero-COVID tolerance policy in China and the Russian incursion into Ukraine.

Quotation from Aenean Pretium

“Buy low and sell high” is an old adage hard to practice in up markets and even harder to practice in down markets.

Economic rescue efforts from the Great Financial Crisis and the Great Pandemic introduced the concept of extreme accommodation by the Federal Reserve and eventually what we coined “free money” that came in part from central bank activity but more so from fiscal stimulus delivered by politicians which contributed eventually to the overstimulation of the US economy resulting in the CRI (current resurgence of inflation).

Be Careful What You Wish For

We can recall a time when 4% inflation (believe it or not) was the Federal Reserve’s goal for the US some 30- plus years ago. Inflation had been much higher than compared to where it is now (US inflation peaked at 14.8% in March of 1980).

Will Irony Ever Cease?

Jumping ahead to the most recent decade we can remember when market observers bemoaned the fact that we were burdened with low growth in part because of low inflation that had fallen to around 2%. Hard to believe it but not that long ago there was a longing for inflation of around 3-4% after falling and sticking around 2% for much of the last decade (nowhere near the current nasty levels reflected in recent readings of stateside CPI and PPI of 8.6% and 11.2%, respectively).

From our perch on the market radar screen the cost of free money, the under production of oil stateside along with the high cost of political largesse in fiscal policy that overstated the scale of rescue administered to the economy at the peak of the COVID crisis through recently have now come home to roost in the form of untenable levels of inflation.

The bad news is that inflation is higher and stickier than expected. The good news is that the Federal Reserve and other central banks around the world have recently taken to raising policy rates and addressing the situation.

The fact that the US Federal Reserve and some other Central Banks including the ECB and BOE may have been somewhat “behind the curve” in adjusting policy is not anything as bad as if they’d chosen to ignore it or delayed addressing it for a long period of time as central banks in the 1960s, ‘70s, ‘80s and even into the early 90s.

Like any serious illness, the sooner untoward levels of inflation are dealt with the better the likely result in putting it in check.

The high inflation of the 70s and early 1980s that had been allowed to flourish and spread across the globe for decades was what in our view forced the hand of Paul Volker to act with draconian measures in monetary policy to stem its further spread when he assumed the chairmanship of the Federal Reserve in 1978.

This time around may very well be different as the Fed has pivoted in relative short order (since Q4 2021) from a policy that proved lax in addressing the current inflation and now has begun to take the issue to task. Ironically the markets, which had complained loudly that the Fed was in denial about inflation (fallen behind the curve), now gets overly anxious as the central bank and others take forceful actions to tame inflation.

Our Goal is Beyond

Our expectations are that market volatility will likely persist near term until the actions taken by the Federal Reserve thus far (in April the Fed raised 25 bp, in May by 50 bp, and in June by 75bp) and the actions it takes going forward have had time to work through the system.

In such an environment we expect patience, prudent diversification and right-sized investor expectations to be rewarded. Volatility that is likely to persist in the interim should present opportunities to traders and longer-term investors with the latter benefiting from “babies that get thrown out with the bath water” (stocks of great companies that get sold off in days of turmoil and negative projection).

Old Adage to Ponder

“Buy low and sell high” is an old adage hard to practice in up markets and even harder to practice in down markets. Successful investing of any kind we believe requires “a steady hand” and emotions that are kept well in check.

In this holiday-abridged week investors are likely to focus on clues as to whether or not the markets have already hit bottom. In our experience over the last 39 years dealing with the markets there never is an “all clear” signal of when to invest. Identifying the bottom (as well as the top) is always easiest to find in hindsight. This time appears no different.

John Stoltzfus headshot

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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