“U.S. economy just had a 2nd quarter of negative growth. Is it in a recession?”, read the headline from an article on Thursday. The technical definition of a recession says – yes, however many scholars and even Treasury Secretary Janet Yellen do no believe this a recession. According to Investopedia, the definition of a recession is “a significant, pervasive, and persistent decline in economic activity.” So, what’s right? We may have to just wait and see. What is known is that the growth we saw in 2020 & 2021 was driven by all the cheap and easy money policies and we’re now paying the price for.
On Wednesday, the Federal Reserve went ahead with plans for increasing their funds rates by .75% for the second time in a row. Their focus remains on slowing overall demand in the economy as they seek to get inflation under control. Also, this week we saw a mixed bag of 2nd quarter earnings reports from some of the largest tech companies in the U.S. including Apple, Amazon, Intel, Microsoft, to name a few. Many of these names went into the year with high expectations that the growth they were accustomed to over 2020 & 2021 would continue throughout the year and beyond. We now know that trend has far from continued. After inflation and the Ukraine-Russia war reared into the headlines, companies quickly changed their stance to a much less rosy 2022 outlook. As a result, 1st quarter earnings were a disaster. As we mention in earlier letters, many companies took the time to throw all the potential bad news out there and proceeded to significantly drop expectations for the remainder of the year. For obvious reasons the market did not like this. From what I’ve learned over the years watching markets, expectations drive EVERYTHING. Too high of expectations will ultimately result in poor stock performance while too low of expectations will result in much better stock performance. Earnings this week have not been “great”, but they are better than expected driving stock prices higher. There have even been some promising reports like the one we saw from Amazon. The headline across CNBC this morning read “efficiency improves, growth accelerates”. A sign that there is room for improvement.
One reoccurring theme during market uncertainty is that strong management teams thrive. They take the time to reevaluate their business model, figure out their core strengths and scrap the rest. “As a company, when you’re in growth mode, it’s tough to always take the time to do all the readjustments you need to do, moments like this give us a chance”, Alphabet(Google) CEO Sundar Pichai said on an earnings call this week. We are starting to see companies “trim the fat” and lay off some of their workforce that is viewed as redundant or not in line with their core strategy. Although it’s never great to see employees laid off, it’s a needed process in a capitalist economy. A higher unemployment rate is even a target of the Federal Reserve to curtail the high inflation they’re fighting. It’s what’s needed to get us back on a strong growth trend. A company like Alphabet has been in this situation several times. Thriving in this type of environment is what has allowed them to grow to be one of the largest companies in the world. Just as Alphabet has been in this situation, so have all of you. Just like a company we must all look at our own balance sheets to see where there is any redundancy or waste to be cut. It’s a natural a healthy process to go through. It never feels good, but it’s needed. Like Sundar said about not paying attention when times are good, we now must go back and reevaluate what’s important in our lives and where we can make some cuts. We’re here to help with that process when you need it!
Just in case any of you happen to win the mega millions, I’ll keep the office number open over the weekend. Good luck!
Steven C. Dengler, CFP®
Financial Advisor / Director of Planning
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Mosaic Asset Partners, LLC is not affiliated with Kestra IS or Kestra AS. Disclosures. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.