I love flying! The first time I was on an airplane was before the age of one. At one point in my career I was travelling monthly. As much as I’ve flown, that feeling when the airplane wheels leave the ground and the plane lifts into the air is magical. There’s something freeing about feeling light as a feather and for a short time having no where to be but right there.
All good things must come to an end, and eventually the loudspeaker interrupts thoughts, lights come on and the plane begins to descend. We have to come back to Earth and move with the regular flow of “normal” life. As the plane descends to the ground tensions rise a little and many hold their breath until the wheels safely touch the ground. Sometimes soft, sometimes a bit rough.
The term “soft landing” has been thrown around lately when it comes to the Federal Reserve raising interest rates. Investopedia defines soft landing as “a cyclical slowdown in economic growth that avoids recession.” A significant amount of money was released into the economy during the COVID crisis. And, now global economies need to orchestrate a way to pull some of this money out in an effort to decrease inflation.
The rapid pace of money supply growth since 2020 has been unprecedented compared to the past 63 years, as shown in the chart below. M2 Money Supply measures all funds that are readily available to be spent, such as cash, checking deposits and other easily-convertible near money such as savings or money market accounts.
“Where has all this money gone?” It has gone to support households that have significantly needed funds during the crisis, companies that needed to keep making payroll while their business was shut down and, ultimately, when it found its way into the public’s hands some likely went to buy needed goods, increase savings and buy investments such as housing and stocks.
The returns we have enjoyed in the stock market since March 2020 have been significant. I may even be inclined to compare the rise in stock prices over the past two years to the sharp ascent Maverick had to tackle in the final mission of Top Gun: Maverick.
The decline we have experienced since the beginning of the year has been jarring and represents the worst first six months of a calendar year in 52 years. However, given the sharp rise we experienced prior to the decline it may be just what we’ve needed to come back toward “normal.” The end of the quarter level for the S&P 500 is approximately where we were in March 2021, a short 16 months ago.
We’ve been on quite a flight the past 16 months. Landing on an air craft carrier isn’t easy. But naval airmen do it every day. Looking at the 10-year chart of the S&P 500 we are much more in line with the “normal” trend than we have been the past 16 months.
In fact, Bespoke Investment Group, LLC, published the following bar chart illustrating where we are currently versus longer term averages. While the one year performance of -10.7% versus 12.0% looks awful, it may be just what we needed to bring the longer-term averages more in line.
We have certainly been brought back to Earth so far in 2022. Do we continue to experience a “soft landing”? The next year will undoubtedly be tenuous as the Federal Reserve continues to raise interest rates and supply chain issues moderate.
I still believe there are signs of a longer runway. Unemployment remains near all time lows, corporate profit margins at 18% are historically high and personal savings levels remain high. The fact that corporations are waving warning flags may also be a good sign. If corporations remain cautious in the next 3-6 months they will be less likely to overextend their debt levels, hire too many employees that may need to be let go or take on other unnecessary operational risks.
That being said, we are not likely to take off again in the near future. It may be a long taxi to the gate. But, it is certainly possible that if we haven’t landed yet we are close to the ground. A sideways market may be just what we need to get our feet back on the ground.
You must be logged in to post a comment.