This monologue will have a point for today’s current economic situation — bear with me for a minute. In 2021, inflation came in just under 8%. We know from the San Francisco Federal Reserve that approximately 3 percentage points were due to the US government pandemic stimulus checks that were sent to all U.S. citizens. The remaining 5 points were due to supply chain interruptions more than anything else. It would stand to reason that once the stimulus checks were spent, the one-time effect on the economy would fade away and inflation would begin to decrease. Then Russia decided to invade Ukraine. I will let the economists argue about the actual global economic impact of that event. Oil did spike at the beginning of the invasion which caused inflation to remain elevated and even climb a little higher. In March of 2022, the pandemic started resurfacing in Chinese port cities. This prompted China to isolate buildings and shutdown certain ports. This event affected the supply chain and subsequently helped to extend inflation further.
The U.S. Federal Reserve announced in March of this year that they would begin to aggressively raise rates to fight inflation. Since then, we have had rate increases of .25% in March, .50% in May, .75% in June and July. Raising rates overall makes certain parts of our economy more expensive thus slowing it down. In other words, the Fed is trying to “destroy demand.” For example, when the Fed raises rates, it usually causes most rates to increase–specifically, mortgage rates. When mortgage rates increase, the housing market tends to slow down, both for new construction and existing home sales. The housing market is roughly 25% of the U.S. GDP. This means that if the housing market declines 10%, then the GDP would decrease by approximately 2.5% annualized. Obviously, this is a big effect. The recent interest rate increases have begun to slow down the housing market but by no means has the full impact happened yet.
The National Savings Rate has declined from 8.7% in December 2021 to 5.7% in June 2022. (Haver Analytics and Rosenberg Research) I suspect that the decrease in savings has gone to pay for higher food and gasoline costs in the first six months of the year. We have all seen the anecdotal stories on the news about people forced to make decisions to go without certain items to pay for food and gasoline. I think a large portion of our citizens already feel like we are in a recession.
The second quarter U.S. GDP was -.9%. After first quarter was -1.6%. (Rosenberg Research) This is the second quarter in a row with a shrinking GDP. However, remember that GDP was 5.5% in 2021. Do two negative quarters of GDP equal a recession? This will be debated for quite some time. Regardless, and more importantly: many people feel like we are in a recession and stock markets respond with volatility to recessions. Historically, markets bottom in a recession. Eventually, markets become optimistic in a recession and start leading the way out. The reason for the optimism is because eventually markets believe profits will start increasing again and the stock prices will follow the optimism.
We have reason to be optimistic longer term, but first we must let the recession run its course.
On a Personal Note…
The month of July is always momentous in our family as we not only celebrate the birth of our nation, but we also celebrate Katelyn’s birthday on the same day! She made a quick trip back from Raleigh for the holiday weekend. It was great having her home for a few days before she returned to her busy campaign.
Rachel and Garrett flew to Seattle mid-July for a 5-day backpacking trip in the Olympic Rainforest. They hiked up to the Blue Glacier which was 40 miles round-trip. The pictures are amazing. Rachel said it was the hardest thing she has ever done. Garrett is totally jazzed and ready to go on his next backpacking trip. I have a feeling he will be doing a lot more backpacking especially from his new home base in Missoula.
On the last day of July, Garrett and I left for Missoula towing a U-Haul trailer. We arrived safely in Missoula and proceeded to unload and setup his apartment in a single day. He had to be ready to go for work by 8:00 am on Monday morning. By Sunday night he was all set up and ready. We watched beautiful sunset over the mountains from his new apartment. Why Missoula you might ask? Garrett researched the Rocky Mountain region from Durango to Missoula. In doing so, he decided that Missoula was the best fit for him. He plans on continuing to climb at the local gym, ski, hike and mountain bike when he isn’t programming for Varis. His job is 100% remote—allowing him to live (and work) from wherever he wants! I know people like to say, “Living the Dream.” In Garrett’s case, I truly believe he is Living his Dream.
Finally, two years after Garrett’s college graduation, Rachel and I are “Empty Nester’s” once again. Rachel and I are excited about our new adventures together–in September we will be traveling to Italy, to visit Rachel’s sister and her family. I’ll let you know how our adventure goes.
I’m actually writing this month’s newsletter on the flight back from Missoula. I’ve already heard from Rachel that Bode has been missing me. He does tend to whine some and let everyone know Dad is gone. Okay, he actually wines more than a little. Rain or shine (or heat) Bode and I will be riding his trail tomorrow morning at sun up.
From the Office:
It’s hard to believe that the summer is beginning to wind down even as the thermostat goes up! We have had a great summer so far. Kajsa especially enjoyed 6 weeks studying abroad in Italy! We are all living vicariously through her tales of wine and cheese. Additionally, we welcomed a new team member – Sarah Sypher! Sarah and her husband are longtime Lawrence natives. In May of 2004, she graduated from KU Law School with a focus in bankruptcy law. Since earning her JD, Sarah founded her own practice in Overland Park – Sypher Law. After the pandemic, she decided it was time for a change. She joins us as a Branch Associate and is currently working on her securities licenses! In fact, she just passed her SIE Exam and is eagerly prepping for the next exam. We are so excited to have her on our team and are looking forward to you all having the opportunity to meet her. Finally, we hope you will all join us on August 17th at 6pm CST for a virtual presentation discussing inflation and the markets. If you are interested in joining us, please contact Amber@RademacherFinancial.com or call our office at 1.785.865.5308.
The information contained in this newsletter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Rademacher Financial and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.
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