Highest CPI in 40 Years.

What’s next?

We keep seeing lots of comments that “this was the month that inflation peaked.” Or “recession is near.” Or “the Fed will start cutting rates, once equities are creamed and we get a recession.”

My thinking is these sorts of comments are all on the right track but they are WAY too early. Inflation rarely reverses itself quickly. Even though the last few weeks run counter to what I’m about to say, I believe we have plenty more energy & shelter inflation ahead of us. Both will likely remain the drivers of inflation for many months to come.

We are in a very tough period to try to invest. We are in a sort of no man’s land. It’s a stagnant investment environment and folks are wanting a resolution soon—even if that resolution is recession. My view is there won’t be any quick resolution to this environment. It’s going to take many months, possibly years, for a return to the low inflation + low rates environment people have come to expect.

Eventually the stock market will quit going down. And it will probably happen around the time the economy begins to look the worst. But we are still in a pretty hot economy. Discretionary spending is still hot! Just look around, everything is packed. That won’t likely unwind quickly. Personal balance sheets are strong. Unemployment is very low. Wages are still increasing. Cost of materials for companies is too. So in the business world, Top line growth will likely continue to increase, while bottom lines look worse and worse.

What am I doing? I’m being very patient. I see virtually no reason to put new cash to work at this time. (Not talking about retirement portfolio.)

When inflation is high, there is no strategy you can flip to that will win. Your only way to keep up is to have already invested in cash generating investments while the price of those assets was still low and out of favor. Be cautious, continue to let your cash balance run up if possible. Remove leverage. And then just wait. This cycle will end with a recession. It just might take longer to get there than most assume. To put it bluntly, I won’t be surprised if 2023 is a busted year for both the economy and equities. But I will be shocked if things still look bad in the 2 quarters leading up to November 2024. Things will eventually get better. What we are looking at today isn’t nearly as scary as what we’ve seen, if you were investing from 2000-2020.

*As always, this is just my current thoughts. They are subject to change and it’s certainly not investment advice.