Summer of Pain?
Summer Investment Woes
With recession fears gripping markets as the Federal Reserve pulls back its easy-money stance to fight high inflation, investors have had few places in 2022 to hide from the carnage in financial markets. Stock markets are down sharply since the beginning of 2022 and further interest rate hikes are on the horizon, causing one expert to predict a “Summer of Pain” for investors. What is behind this claim and can the Fed execute a “soft landing”?
Stock Markets Are Down YTD
Stock markets have recorded significant losses since January 2022. Higher interest rates reduce the present value of future company profits. Shares were marked down accordingly. Technology firms whose profits could be projected furthest into the future have taken the biggest hit. The NASDAQ Composite, which contains 100 of the largest non-financial companies, dropped from 15.832 points down to 11.740 points on May 26, 2022. That equals a year-to-date loss of 26%. See chart “NASDAQ Composite” for details.
Of course, some individual tech stocks fared even worse. For example, Tesla stocks were trading for $1,199 at the beginning of the year and are now changing hands for $707. That represents a 41% loss in stock value.
The much broader S&P 500 index performed only a little better than the NASDAQ, as it only recorded a drop of 15%. It started the year at 4.786 points and traded for 4.057 points on May 26.
Even before the Russian invasion of Ukraine, inflation and potential interest rate hikes had been impacting equity markets. In expectation of higher interest rates, many institutional investors began pulling their money out of stocks. The result has been a significant drop in equity values across the board.
More Losses to Come in a “Summer of Pain”?
Recently, the Fed’s rate-setting committee raised the benchmark federal funds rate to a target ranging between 0.75% and 1%, a hike by half a percentage point, which represents the largest hike in over two decades. It is expected to raise rates by another half a percentage point at its June 14-15 gathering, as U.S. inflation stood at an 8.3% annual rate in April, according to the Labor Department, well above the Fed’s target rate of 2%.
Accordingly, the Fed has made it abundantly clear that it is aiming to continue raising interest rates, despite the possibility that it could result in a disturbance in equity markets and elsewhere. “Restoring price stability is an unconditional need. It is something we have to do… There could be some pain involved”, said the Chair of the Fed, Jerome Powell, in an interview with the Wall Street Journal on May 16.
That is a clear signal to investors that the Fed should not be relied upon to throw investors a buoy as monetary-policy makers attempt to combat an outsize dose of inflation. The implication is that the Fed will continue to raise rates until they see a clear breaking of the inflation trend. They are willing to go above a neutral rate, referring to a level of interest rates that neither stimulates nor restrains the economy.
These circumstances have led the Guggenheim Partners Global Chief Investment Officer, Scott Minerd, to describe the coming months as a “summer of pain.” He believes the Fed is headed towards over-tightening financial conditions, causing economic activity to slow, and unemployment to rise, thus starting a recession. He predicts, over the course of the summer, the NASDAQ could drop 75% from its high on Nov 19, 2021 and the S&P 500 could drop 45% from its high on Jan 3, 2022.
Soft Landing – A Way to Avoid Recession
In 1994, the Fed was able to successfully temper the US economy and execute a so-called “soft landing.” In the 12 months that followed February 1994, the Fed, under former Chair Alan Greenspan, nearly doubled interest rates to 6% in just seven hikes, including two half-point increases and one two-fifth-point hike. See chart “1994 Effective Federal Funds Rate Development” for details. Powell’s recent half-point increase along with his indication to do so again appears to be a move straight from the 1994 Fed’s playbook.
Over the next few months, the Fed will attempt to engineer a cooling of the economy that leads to lower prices but doesn't spiral into recession. The history of central bank rate hikes appear to support the inevitability of an economic downturn, but there have been rare instances when the Fed has made a soft landing: Once in 1965, again in 1984 and 1994.
However, there are some major differences between 1994 and 2022, and timing may be the most important factor. Greenspan proactively raised rates. He saw that the economy was booming and wanted to get ahead of the inevitable inflation. Powell has been more reactive. He hiked rates by half a percentage point only after inflation soared to levels unseen in decades. There is a possibility that the Fed may be too far behind the curve to be able to ease inflation without inflicting economic hardship on Americans.
Other important differences include employment and geopolitics. In 1994, baby boomers were at the heights of their careers. Today, they are ready to exit the workforce, leaving a big gap to fill for the millennials. Geopolitically, 1994 saw the adoption of the North American Free Trade Agreement. A few years prior, the Berlin Wall had fallen. Both events increased the availability of imports and lowered the cost of goods. Today, globalization is in retreat as the pandemic and war in Ukraine have led to significant energy price shocks and supply chain disruptions.
Given today’s market environment, a soft landing is not impossible to achieve this time around, but the degree of difficulty is much higher than it was 28 years ago. Should the Fed fail to achieve a soft landing, then we are very likely to experience a “Summer of Pain”.
What Does it Mean for Investors?
Investors should look for low-risk and high-yield projects, such as first trust deed lending options secured by rental properties.
Safeguard offers short-term construction lending options that pay between 10% - 12% and are on 6 – 12 month terms. We also offer 3 to 5 year loans on fully renovated properties with tenants in place that pay 9-10% interest. Lending options start as low as $35,000
Real estate lending is an attractive and easy way to earn an income above the inflation rate. Our team has specialized in recommending investments with low-risk and high-yield profiles. Therefore, we encourage you to reply to this email or give us a call: 877-280-5771
Featured Loan of the Month:
Address: 1503 Wilmington Ave. Baltimore, MD 21230
Loan amount: $275,000
Description: Commercial warehouse/shop
Term: 3 years (can be reduced upon request)
Interest: 10%
Appraisal: $460,400.00
Loan to ARV: 60%
Monthly loan payment: $2,291.66
Square feet: 3,136 square feet
Cash Down Payment: $25,000 to $80,000
Scope of work: Click here for scope of work
Photos: Click here for photos
BPO/Appraisal: Click here for BPO/Appraisal
This property is being purchased by our long-term investment partner Ricardo who owns hundreds of properties in Baltimore and Philly. Ricardo has a perfect on-time payment track record and we have been working with him for over 5 years.
He is purchasing this property as a facility warehouse for his materials and operations in Baltimore. He will be making payments directly to you, the lender.
This loan comes with a $3,000 rebate at closing due to an expedited closing request!
Please let us know if you have any questions or would like to reserve this loan.
