The markets had their worst first half of the year since 1970, with the S+P dropping more than 20% and the Nasdaq falling by about 30%. This is against a backdrop of tightening monetary policy and higher than expected inflation. The good news is that typically after downturns such as this, the market rebounds nicely over the next couple of years. Corporate profits have remained strong and we will know more as we enter earnings season in a couple of weeks. Also we are looking forward to seeing a reduction in inflation, which has to happen sooner or later with the moves the Fed continues to make. Hopefully that happens soon, and the Fed can take a more cautious approach to tightening.
The economy has slowed a bit from its vastly overheated state at the beginning of the year and it could be that we see a “recession” soon. Keep in mind that the Fed is trying to slow down the economy, and a short period of GDP shrinking from its astronomical pace would not be the end of the world. I put “recession” in quotes because if we get one soon, it won’t feel like past recessions. There are still 11.4 million unfilled jobs in this country and few people are worried about losing their jobs and being able to pay their bills. Yes, things could be slightly worse than last year for businesses, but slightly worse than the best ever isn’t all that bad.
If corporate profits can maintain their level, then the stock market is very well priced, and even cheap if you look at small and midcap sectors. So far earnings guidance has not shown a big drop in profits and we hope that won’t happen. Our plan is to continue to buy the dip if the dips continue and pick up underpriced stocks.