I have 7 questions about stocks and the economy

Some questions I’m thinking of at the moment:

1. Does inflation provide us with a great buying opportunity? When the inflation rate was still less than 2%, I asked if Inflation can give us a great buying opportunity in stocks.

The price hike went much higher and lasted a lot longer than I assumed at the time, but it’s worth revisiting this question in light of the bear market in stocks.

Many people think we could be headed for a return to the 1970s where inflation has been high for years. It’s possible but let’s take a look at what’s actually happening since the Fed has openly told us it will fight higher rates:

  • Interest rates are rising.
  • Mortgage rates have basically doubled from their lowest levels.
  • All the speculative elements like IPOs, SPACs and cryptocurrencies have all crashed.
  • All companies that don’t make money are penalized.
  • The Federal Reserve is raising interest rates.
  • The government stopped the public finance spigot.

Remember, the Fed was loosening monetary policy in the early 1970s. Paul Volcker It didn’t take over until 1979, eventually raising rates to astronomical levels to slow inflation and push the country into two recessions in the early 1980s.

Jerome Powell and his cohorts don’t seem too keen on letting this continue for an entire decade.

Sure, we could go into a recession and the stocks could go down even more. But doesn’t it look good at some point if the Fed can tame inflation?

2. Why do markets always seem so much easier in hindsight? Well, that’s rhetorical and obvious but it’s also what drives the markets crazy.

You could tell me inflation will be 3% a year from now and the stock market will be back to all-time highs again.

Or inflation remains stubbornly high at 5-6% and markets continue to struggle.

What if supply chain disruptions continue or commodity prices continue to rise? What if the Fed couldn’t stop some kind of wage-price spiral?

Maybe the Fed is throwing us into a bad recession or maybe there will be a soft landing.

Whatever happens, it will appear obvious in the rearview mirror but it is now difficult to determine the most likely outcome.

3. Is the Federal Reserve really to blame for all this inflation? UK only mentioned Its highest inflation rate in 40 years at 9%.

Prices are going up in places like France and Germany too:

I understand all the hate directed at the Federal Reserve. They kept their feet on the throttle for too long and now they go in reverse and take off on breaks. There was no reason to keep buying mortgage bonds while the housing market was in its biggest boom ever.

But you can’t blame the price hike exclusively on the Federal Reserve.

Clearly, the pandemic has caused problems in other countries as well. Supply chains were a problem. So there is a shortage of labor. Governments around the world have spent trillions of dollars. Consumers were bored so we started buying things.

And now there is war.

If the Fed is not the main cause of inflation, can it be the main solution?

I think we will find out in the coming months how high rates of re-supply and demand should go into alignment.

4. How will the rapid rise in mortgage rates affect home prices? Historically, housing prices have held up well When mortgage rates go up.

But the speed of this rate increase combined with the price hikes of the past two years puts us in uncharted territory.

Bill McBride He laid out three possible scenarios this week:

(1) Slow: single-digit price growth.

(2) Booth: Prices do not go anywhere.

(3) Bust: Prices drop by 5-10%.

“The data appears to be indicative of a slower home price growth scenario, but my view is that the most likely scenario is that home prices will stop in nominal terms and decline in real terms,” McBride says.

I know a lot of first-time homebuyers would like to see a crash, but even stall prices will make things healthier in the housing market than we’ve seen in the last 18 months or so.

5. Is Disney the poster child for hard picking stocks? Disney owns some of the most famous brands on the planet.

My kids have watched every animated movie dozens of times. These songs stuck in my head for weeks on end.

They bought Pixar in 2006. Then they bought Star Wars in 2012. They also purchased the only cinematic universe that seemed to make any money in 2009 with their purchase of Marvel.

subordinate The 20 highest grossing films of all timeDisney owns 12 properties.

Michael Eisner and Bob Egger Both are visionary CEOs.

I’ve taken my kids to Disney World twice – it’s one of the most magical, crowded and expensive places on earth and people can’t wait to go there year after year.

And just look at how fast Disney+ is gaining on Netflix in terms of subscribers:

However… Disney’s stock price has underperformed the S&P 500 since the creation of the SPY ETF in 1993:

Clearly a lot of this poor performance has happened in the past year or so. The pandemic hasn’t helped the theme park business, and Netflix has removed the entire streaming pool due to their recent struggles.

But that’s three decades in which one of the world’s biggest brands has underperformed the stock market.

Investing is difficult.

6. Was A Quiet Place Part Two one of the best sequels of all time? I loved the original and watched the sequel when it came out on demand. It’s on Amazon Prime now so I decided to rewatch it.

It holds up.

I’m a sucker for space movies. The first 10 minutes of this movie might be one of the best introductions I’ve seen to aliens.

Here is a list of the best sequels of all time in no particular order: The Godfather Part Two, Austin Powers: The Spy Who Got Me, Back to the Future Part Two, Terminator 2: Judgment Day, The Dark Knight and Before Sunset.

I’m not a big fan of Star Wars but I think you can talk me into The Empire Strikes Back as well.

7. How far should this bear market go? I wish I knew.

Some people want to see more giving up. others feel Everyone Everything is now tolerated. Some believe that stagnation is an imposed consequence. Others feel we can postpone the slowdown for a few more years.

The problem with trying to lock in a bottom during a bear market is that fundamentals and sentiment indicators can be thrown out the window.

Emotions are more important than basics in the short term, and sentiment readings are more difficult than ever to interpret because anyone wants to have a platform to share their opinions these days.

The trajectory of the stock market can stop on a dime. They can cause maximum pain and reduce our intensity. Or it could cut investors for months and months in a volatile range.

It’s inconvenient to say “I don’t know” but sometimes when it comes to investing, this is the safest place.

Michael and I talked about all things bear markets, Disney, the Federal Reserve, inflation and more in this week’s Animal Spirits video:

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In-depth reading:
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Now this is what I was reading recently:

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