Skip to main content

Sound Advice: August 17, 2022

Recession . . . and then what? 

The prospect of a recession and the repercussions that come along with an economic downturn are unsettling to investors, but by the time there has been a reasonable level of agreement about such an occurrence, most, if not all, of the typical pullback in stocks has already taken place.

 

Although periods of economic weakness are different and brought about by varying, often unique, developments, the result tends to be similar.  The stage is set when the stock market has reached excessively rich levels.  Even so, that alone rarely starts the drop.

 

The trigger is usually an event or series of events that raises the level of uncertainty among Wall Streeters . . . as well as the public . . . and begins a chain of fear-induced selling.

 

Over time, stock market valuations tend to be either too high or too low.  They are rarely near the average of past valuations, which ranged between 15-18 times estimated earnings for the then-current 12-month period.

 

When corporate earnings are accelerating, valuations widen.  And vice-versa.  Investors tend to make their buying and selling decisions based on what they see as future prospects.  That’s what the analysis of stocks is all about.

 

For companies growing steadily, the task of determining a normal range of prices and values is manageable.  For cyclical companies such as those in the construction industry, it’s more difficult.  And then there are those undergoing major changes, perhaps new management or a marked detour in their products or services.  Often, these are companies that have been in a rut, hoping big changes will bring big improvement.

 

These are referred to as turnaround situations.  The stories usually sound promising, but most of them prove to be disappointing.

 

That perspective is helpful is getting a handle on the current economic situation.  Here, too, we have a prospective turnaround.  But for the economy, unlike individual companies, recovery is virtually guaranteed.  What is unknown is the timing.

 

Most stocks are still down from the start of this year and further interest rate hikes by the Fed are likely through yearend and into 2023.  Employment data continues to appear promising, though some easing in this area seems likely.  Inflation is high, but as supply constraints ease further prices may well start heading lower.

 

With all of this said, prospects for the market averages are continuing to improve.  It would not be at all surprising to see increasing strength through yearend and beyond.

 

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

 

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: September 19, 2026

Is AI good news or bad news for investments? AI is potentially very good news for investors—but not automatically good news for every investment . The key distinction is between AI as an economic technology and AI stocks at today's prices . As of September 2026, there are compelling reasons for both optimism and caution: The bullish case: AI spending remains enormous. Gartner estimates global AI spending at $2.7 trillion in 2026 , up 49.5% year over year. If AI produces sustained productivity gains, corporate profits could expand well beyond the companies currently selling AI hardware. The valuation case: Investors have already priced in a lot of success. Valuations of major AI companies are elevated and expected long-term earnings growth is well above historical norms. The spending-risk case: The five largest hyperscalers are expected to spend more than $1 trillion on AI-related capital expendit...
Post a Comment
Read more

Sound Advice: September 30, 2026

Now what? For many women, there comes a time when financial confusion reigns.   It may come after a spouse passes or a marriage goes off the rails.   It’s the same situation for women who never married. The questions are many.   The answers may be few.   Toward the top of the list of concerns is the issue of understanding.   Although there are always complex matters, it’s essential that all of the elements are clearly presented in a straightforward fashion.   There’s more.   Presentation is one thing, but comprehension is another. If there’s a question, it must be asked.   Clarity is the key.   Don’t just say I get it when you don’t.   And, it’s essential to grasp how each of the items fits in the overall situation. In the absence of understanding, no decisions will be made. Here are some of the most pressing questions? What’s the smart way to handle my investments? Where should I go for advice? A bank, stockbroker, attor...
Post a Comment
Read more

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more