The Fed raised rates another 0.75% yesterday.
The Fed Funds Rate now stands at 3%, up from 0% on January 1st.
And Jerome Powell signaled that they’ll likely raise rates another 1.5% before the end of the year.
What about a recession?
The Fed Chair also alluded to the fact that he’d be willing to let the economy go into a recession in order to cool off inflation.
Eek!
Now before you run for the hills, not all recessions are created equal.
2008 and 2001 were NOT normal recessions.
Most recessions only last 9-12 months and the market downturn is usually about 24%.
And typically the worst recessions come out of nowhere.
The fact that we’ve been talking about a recession endlessly all year tells me that if it actually happens, it’ll probably be one of the lighter varieties.
So a recession might happen, but it should be ‘normal sized’.
What about inflation?
Unfortunately, raising rates may cool the headline inflation number – i.e. cool demand on “stuff buying” – but I can’t see it helping with energy and food prices.
Gas is expensive largely because of Russia.
And food is expensive largely because of Russia.
So even if the Fed gets core inflation down, it’ll still be expensive to drive and eat for who knows how long.
What about the market?
As for the stock market, be prepared for more pain. I’m not saying it’s going to happen, but it might.
“So why wouldn’t we get out of the market to ‘wait it out’?”, I hear you asking.
Because you never know when it’ll snap back.
We dropped 30% over 30 days when COVID hit and we got it all back within 45 days.
When the market rebounded from the Great Recession it was up 25% in 30 days, 36% in 60 days and 51% over 6 months.
And I can tell you from experience, people who got OUT of the market missed ALL of those rebounds.
What about the takeaways?
– If a recession happens, it probably won’t be a big deal
– Food and gas might stay expensive for a while
– Be mentally prepared for more temporary portfolio losses
– Stick it out because when the market turns around, it happens fast and you won’t want to miss it
