Dark thunder clouds are gathering on the horizon of international affairs. Flashes of lightning illuminate belligerent armies, rising inflation, striking workers, and concerning supply chain interruptions.
Evidence mounts that Russia is piling forces on three fronts to prepare for a possible attack on Ukraine. The Fed just finished an emergency closed-door meeting to decide how to curb inflation. Brigades of Canadian truckers are blocking the ambassador bridge to the U.S., cutting off a vital supply line. And all the while, oil prices surge upward in anticipation of a shortage. Gold, the traditional inflation hedge is making a comeback.
Don’t be so quick to listen to the weatherman, though—he’s wrong half the time.
Which Way Is the Wind Blowing?
The sky is dark, and the weather foreboding. But dark clouds don’t spell economic gloom. Let’s parse through the noise and look at the facts. Corporate earnings have risen. The C Suite guidance on the prospects and outlook for the future is positive. Our unemployment rate is at an all-time low amidst a HOT labor market. Malls and restaurants bustle with activity. The Baltic Dry index has started to tick upwards, implying a demand for raw materials and finished goods. None of these seem like recessionary signs to me.
Likely, those storm clouds signal nothing more than a light shower bringing some much-needed rain to parched fields. Corrections in stock markets are healthy for long-term prospects. Like the natural ebb and flow of the tides or a refreshing spring storm, they’re part of the natural rhythm that enables new, more vigorous life.
What Are the Complicating Factors?
The one canary in the coal mine is interest rates. Bull markets end when capital finds guaranteed returns in other assets. That change happens when interest rates rise high enough. History suggests that when the interest rate is higher than 5%, Bull markets end because of the classic rotation from risky asset classes to seek the highest rate of return for the lowest risk.
One of the key players in determining how events play out is the Federal Reserve. The Fed is the weatherman that the market watches to determine the strength of the coming storm. They’ll decide how aggressively to increase interest rates to curb inflation. The key will be striking the right balance to control interest rates without inhibiting growth. If the Fed gets too aggressive, the medicine will become the poison. A refreshing rain will become a devastating storm for a robust economy humming along despite supply chain issues and shortages of critical components.
What’s the Bottom Line?
Ultimately, storms pass. Spring will be here before we know it. The clouds might look intimidating, but we need to pay close attention to the weather reports to determine how heavy that rain will actually be. Right now, it seems that we’ll weather the storms just fine. Demand for computer chips, steel, and new homes is high. The labor and supply chain issues causing so much thunder are constraints that the economy will work through. Disruptive companies are innovating; major structural shifts are underway.
Bottom line: Our economic future is bright. Sunny days are ahead in the good old US of A. The economy will continue to hum along, and stock prices will rise in tandem with rising interest rates. Before we know it, those thunder clouds will break apart, and the sun will shine down on a fertile landscape bursting with new life.
