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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

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