Scott Kahan on Investing: Waiting for Godot?

Scott Kahan |

How bad are things?

We’re in volatile times. Inflation and the Federal Reserve’s actions to combat it are the driving forces. But people should not overreact. This is the business cycle.

Are we in, out or waiting for Godot when it comes to RECESSION

Not long ago the talk was that we are in a recession because the economy saw two consecutive quarters of negative growth – which is often referred to as “the technical definition” of a recession. But then, as now, the economy was sending conflicting signals. Cooler heads pointed to the fact that job growth continued, a counter economic indicator to recession concerns. Cooler heads prevailed at the time.

Now we see job growth slowing and with an inverted yield curve (where short-term rates are higher than long term rates) recession is back in the conversation. And the new questions are when and how severe? While Godot never came for Vladimir or Estragon – recessions do happen. But that needn’t worry investors.

Why is that?

Powell is doing what he can to fight inflation. Some say he acted late. Others are concerned he may overdo it, that there is a lag time before rates slow the economy. These voices are calling for Powell to slow his rate increases because he may not need to raise them so high that they will cause a recession. It remains to be seen if Powell can soft land this economy. But if he does – Godot may never show up after all.

Has the market already priced in a recession?

That was my next point. We saw a big sell-off in the market in June followed by a July rally. Now we’re testing June lows. But the stock market is forward looking and whether the full repricing is reflected in today’s market or not – the repricing process is happening.

The good news for investors who don’t panic is that when and if we enter a recession, historically that is a good time to buy stocks because the market tends to rise in a recession – anticipating its end.

How bad might this recession be – when and if…

Nobody knows but there are some factors we can look at with relief. One is the housing market. Although rising mortgage rates will depress home prices, housing supply has been very low even as home prices peaked earlier this year – we don’t see a real estate crash. That’s a good thing. We also see inflation stabilizing that’s encouraging those voices calling for the Fed to be patient moving forward.

Finally, despite a variety of issues contributing to our current inflation rate including the war in Ukraine, remember the core force behind inflation was the supply chain. And retailers like Walmart are reporting supplies increasing, warehouses filling up and that very well could result in price cuts.


What should investors do now?


We manage our client’s portfolios with the discipline of maintaining the asset allocations formulated to suit their financial plans whether they are saving for college, to buy a new house, for retirement, or in retirement. With both bond and stock prices down most of our clients’ portfolios have remained in balance. Which obviously would not happen if dramatic movement up or down occurred, as it typically does, in just one of those asset classes.

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