Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Q
New Market Lows, Buffet Buys

May 18, 2022

More negative news was released last week by the University of Michigan of their consumer’s sentiment report. Consumers are getting discouraged despite strong employment and continued wage growth matching inflation. The report indicated consumer sentiment fell to 59.1 in May and the lowest reading in eleven years, going back to August 2011.
The good news illustrated in the above consumer sentiment chart going back to 1978 since the University of Michigan started releasing these reports, a reading below 60 has always been a precursor to improving consumer sentiment on the economy and their employment situation, the result of an improving stock market. On Monday, Mark Pender of Econoday stated in his Global Economics report:
 
“The availability of goods, and related inflation, appear to be factors for the US. Early May has seen some particular problems like shortages of infant formula and a spike in the prices for poultry and eggs due to an outbreak of avian flu. Gasoline prices are again on the rise. Although wages and benefits continue to increase, US consumers are concerned that higher prices will eat up the improvement in household incomes. There also may be a sense that the labor market isn't as favorable as it has been…..On the plus side in the report, inflation expectations are holding steady, at 5.4 percent for the year-ahead outlook and 3.0 percent for the 5-year outlook, the latter reading offering reassurance to the Fed that long-term inflation expectations, at least for now, remained anchored.“  
 
Institutional managers have a higher degree of success than the lesser experienced investors in identifying buying or selling opportunities. If anything, the inexperienced investor crowd seems to have a knack for selling at the bottoms of market corrections and buying at near tops of cycles. As consumer sentiment has plunged to an eleven-year low, Warren Buffet has become a buyer. The Wall Street Journal reported today:
 
“The stock market’s selloff has been bad news for most investors. Not for Warren Buffett and his team. Mr. Buffett’s Berkshire Hathaway Inc. has used the slump as an opportunity to increase spending on stocks, deploying tens of billions of dollars the past couple of months after ending 2021 with a near-record cash pile.”
 
This is not to say the present-day concerns of inflation, the Ukraine war, supply chain disruptions, and rising interest rates are not real concerns. However, institutional investors are investing for the future and not present-day circumstances. The quote, “skate to where the puck is going, not to where it is,” applies to hockey and investing. If you believe the current recently developed state of the economy of rising inflation and interest rates, Ukraine war, etc.,, will be the same or worse several years from now, then, yes, sell everything. If on the other hand, as apparently Mr. Buffett believes, today is not indicative of the future, and these headwinds will dissipate, and today’s values are buying opportunities for future profits. 
 
BTW: Hockey great Wayne Gretzky, who has been credited with this quote, never said it. It was his father, Walter Gretzky, who said, “Go to where the puck is going, not where it has been.”

What Does This Mean to Me?

The major indices have finally strung three of four positive days since last Thursday. For this period at today’s close, the indices are up:

• DJIA + 2.01%
• S&P 500 +4.04%
• NASDAQ +5.40%

For the year, the indices have dropped sharply, with the tech sector selling off the hardest now in the bear market territory (down 20% from the previous peak). Through today are the following returns of the indices:

• DJIA -10.14%
• S&P 500 -14.21%
• NASDAQ -23.40%

A good portion of last year's gains has been lost to this year’s correction. However, looking at a five-year chart of the same indices, you can see the skyrocketing gains after the pandemic that, without a correction, the current market would be seriously overvalued and potentially set up for a major market selloff.

Our view is the economy has the tailwind of good employment, increasing household savings and income, a stable dollar, and stronger sustainability than most other countries. The US economy has the ability to recover from the recent pop of inflation and interest rates.  
 
At some point, the rise of inflation will crest, and interest rates will run into resistance as lenders experience a drop in applications. The Federal Reserve Board has a history of its interest rate policy being influenced by good or poor stock market performance. During this market correction, it is possible the Federal Reserve may be less ambitious with additional rate hikes in the near future. The housing sector represents 31% of the Consumer Price Index (CPI), and the recent 100% rise in mortgage rates over the past 60 days will significantly impact buyer qualification and demand. A slowing in the housing sector alone will reduce the rate of inflation and potentially ease the Federal Reserve’s concern about inflation.
 
If it weren’t for the stock market in a correction and the constant drone of bad news from the media, most people would not be concerned about a pending recession. Employment participation is back to near full employment, unemployment at 3.6% approaches this century’s record lows reached in 2019, and employers have more than 11 million job openings waiting for anyone still not employed. With key mid-term elections coming up, it would not surprise me that once the stock market begins to recover, stories of looming recession fears will dissipate. Also, well known among politicians that incumbent candidates up for re-election do not benefit from the poor economic climate and frustrated voters. 
 
Currently, the S&P 500 is well below both its 50 Day Moving Average (DMA) and 200 DMA. We would not recommend investing in new funds until there are technical market indicators of a new uptrend. We do recommend that 401k participants allocate most or all current payroll contributions to stock or growth funds in your plan to capitalize on dollar-cost averaging of buying at these current low prices.

Give us a call if you have any questions about this Brief or discuss your future financial planning. We welcome the opportunity to be of assistance and help guide you through this and many other volatile markets in the future.

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