Location, location, Inflation
In so many ways, success in real estate is derived from three things, location, location, location.
Not surprisingly, when you look at how the stock market has been behaving lately, you can perceive the same thing with a slight twist: Inflation, Inflation, inflation.
Simply defined, inflation is the rate of increase (or decrease) in the price of a basket of goods purchased for consumption by households. The 8 major groups making up the basket are food & beverage, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. If you have been to the grocery store lately, bought a house, went anywhere or done anything, then you know that inflation is out of control.
When discussing inflation we usually focus on one sector, oil and gasoline, which is up 30.3% over the 12 month period ending April 22. But used cars and trucks are up 22.7% during the same period. And food prices are up 9.4%. Baby formula is up, well never mind about baby formula because you can’t get it anywhere for any price. But when you look at the entire basket, inflation is running at 8.3%.
What is causing prices to sky rocket? Some say it’s the war in Ukraine and Putin. Others, the fallout from the Pandemic and the multi-trillion dollar rescue plans from both the Trump and the Biden administrations. Then there’s the tight labor market that is driving up wages. And don’t forget the back up in the supply chain. It’s somewhat surprising that the inflation rate isn’t higher than it is.
Where are we going from here? Well, the IMF (International Monetary Fund) is projecting that inflation will begin to ease from its current high levels, to 2.86% in 2023, and then leveling off at 2% thereafter. How realistic is this? If you have faith in our government’s ability to admit to its own mistakes, and then correct them, then it should be a piece of cake. By the way, I have a lovely bridge for sale and…………………….
In my opinion, we are going to continue to fight this inflation bug for several more months. The volatility that we have experienced over the past 2 quarters will continue thru the summer. But we should see some slight improvement in the later part of Q3 and continue to improve thru Q4. The market should rally from its lows and we will end the year stronger than current levels. I don’t see a recession in my base case through the next 12 to 14 months, and if our government will get out of the way then we could return to previous levels; although I am not holding my breath.
Value continues to outperform Growth and will through years end; I believe in an overweight towards Value in my base case. Strong balance sheets and attractive dividends continue to be in vogue. However, quality Growth at current prices are attractive for the long term investor. Meanwhile, fixed income is difficult at best and will continue to be challenging. It is likely that the FED will turn more dovish and rising rates will slow. To combat this sector I would lean toward an overweight in Market Linked Notes that provide downside protection.
There is a lot going on in the market, but nothing that we haven’t witnessed before. Every time I turn on the business shows I see nothing but doom and gloom. What should you do? Given the nature of the market, and the inflation mess we are currently in, there are a handful of things I would recommend. First, go see Top Gun: Maverick. I saw it the day it came into theatres and it was great. It’s the first movie I have seen in the theatre in years and it didn’t let me down. Second, find some place local and spend your time and money there. Airline tickets are very expensive and you run the risk of cancellations; there’s nothing that nice nor worth that risk. And finally, find a place where you can give some of your time to others. We usually look at doing this around the holidays, but often time there are so many want-a-be volunteers that they have to turn them away. Check your local animal shelter or homeless center. You will be surprised at how much joy you get out of it, and you will be appreciated more than you know.
But above all, don’t worry about what’s going on in the market; after all, that’s my job.