Endure Short-Term Pain to Enjoy Long-Term Gain: How can a market RESET cure the economy?
help you boost your investment portfolio. My goal in these articles is to encourage you to apply these strategies so you can achieve financial stability in the long run. Today, I’m excited to share with you another awesome investment insight by my friend and colleague, Professor Joel Litman. Ready? Read on to know why a recession is not that all bad in the economy.
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Endure Short-Term Pain to Enjoy Long-Term Gain: How can a market RESET cure the economy? Michael Hartnett is the Managing Director and Chief Investment Strategist at BofA Global Research, a wholly owned subsidiary of Bank of America (BAC) Corporation. He identifies key global market trends and offers strategic insights and solutions to both institutional and retail investor clients. Hartnett has his eyes on 10-year bond yields. In his view, as long as long-term yields stay below 5%, the market should more or less stay put. In 2023, 10-year yields started at around 3.8%. That’s already about as high as they had been since after the Great Recession. Then, as the Federal Reserve kept raising interest rates, the percentage rose to 4.8%. Was that something that worried Hartnett last year? Not really. He said that without the 10-year yield crossing the 5% threshold, there wouldn’t be a meaningful sell-off from the S&P 500. Coming from that viewpoint, it looks like investors can breathe a sigh of relief for now… but in reality, it’s still not enough if they want to put the current market environment behind them. As we’ll explain in today’s article, the economy needs a RESET… and the market stalling out won’t provide that.
The Cure to the Economy According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, investors have been set on the “soft landing” story for a while now. He states the market thinks it wants a controlled and moderate slowdown that doesn’t push into a recession. This scenario would be great for investors in the short term; stocks wouldn’t drop as much. … but here’s the thing: A “soft landing” won’t be the end of the story. If the economy never shrinks, the Fed is also never going to lower interest rates. Fed Chair Jerome Powell has been clear that he’s prepared to raise rates if needed. He’ll keep them high for as long as it takes to completely wipe out inflation. BAC’s Hartnett agrees with the strategy. He views a recession as a necessary “reset” for the economy—one that will allow the Fed to cut interest rates when it’s safe to do so. The result of that? Power for the next bull market. Professor Litman says this wasn’t the first time such an economic cycle played out. In 1947, the central bank also hiked interest rates to combat soaring inflation. That period’s inflation was primarily spurred by the economic surge following World War II. Supply couldn’t keep pace with demand as returning soldiers went on a spending spree and manufacturing returned to normal. So, to curb inflation, the Fed took measures to hurt the economy… just like today. By 1949, the move turned into a recession. The Dow Jones Industrial Average fell as much as 20% during the downturn. Then, from the recession lows in June 1949 through the end of 1950, the average rose 41%. See? It wasn’t so bad after all! In other words, a recession might be the most suitable remedy for the economy of the 2020s—the same way it was in the 1940s. Besides, the central issue now isn’t whether or not interest rates and bond yields surpass 5%. The bigger point is that for those rates to come down sustainably, the market needs a more serious “reset.” Here’s Professor Litman’s advice: Brace yourself for some turbulence in the short term… and try NOT to panic. You’ll see, this will be good for the market in the long haul. Hope you’ve found this week’s insights interesting and helpful. EXCITING NEWS AHEAD The world of work has shifted, and there’s no going back. The barriers to entry have never been lower for talented professionals to work independently, and today’s massive external workforce is hardly a pandemic-produced fad. Business owners can only survive in the new work landscape by partnering with this deep talent pool. With decades of experience in both small-business entrepreneurship and executive management at PwC, I truly believe that the future of work is independent. With that, I’m happy to share with you that my book, co-authored with Walter Scott Lamb, is now available for pre-order on Amazon! Free Birds Revolution: The Future of Work & The Independent Mind This is an essential read for both independent professionals and corporate executives. Here, we provide educational and practical guides to unpack the ever-growing workforce and offer you crucial ways to become a client of choice. Click on the link above to pre-order your copy. Let this book help you future-proof your career and organization in the new world of work. Stay tuned for next Wednesday’s The Independent Investor! Despite being early to introduce various technological innovations, tools, and products, Samsung is still playing catch-up to Apple. Learn more about the importance of honing your competitive advantage in next week’s article! |
