More difficult times are likely ahead for markets and investors need to be brave

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., Nov 9, 2022.

Brendan Mcdermid | Reuters

It’s a wonderful and very strange time of year for the markets and the economy. In anticipation of the most anticipated recession in history, things are not bad.

The S&P 500 closed Oct. 10 at its lowest level of the year. 12 when it was down nearly 25% for 2022. Since then, it has rebounded sharply and is now down about 15%. Earnings continue to rise and expand, even as some companies have missed Wall Street’s expectations and been punished. This week, a company reported strong highs and lows but hinted that its full year was likely to be at the low end of its expected range, and the stock fell. When investors are nervous, there are fewer safe places to hide.

Investors should probably continue to feel nervous. While most seem desperate for this recession to end and the Federal Reserve’s rate-tightening cycle to end, the longing won’t make it happen. Despite some good earnings numbers, there are worrying historical indicators that strongly suggest an impending recession.

Recessions follow patterns and are all defined by contractions in various types of economic activities and measures. On average, stocks are down about 30% and earnings for the S&P 500 are down 20%. Since these are averages, the actual numbers may be higher or lower. Perhaps the bottom of about 25% of the S&P 500 will hold, or perhaps lower lows are on the way. Inflation is slowing, but it rarely slows significantly without rising unemployment. It hasn’t happened yet, and maybe it won’t. If it doesn’t increase, it would be rare enough to be considered aberrational. I never thought it wise to expect anything outrageous. I expect the unemployment rate to approach 5.5%. Historically, it’s not a bad level.

Consumers make up two-thirds of the US economy and have spent. It’s nothing new. US consumers spend more reliably than almost any other type of consumer in the world. They’re feeling somewhat positive because of the pay raises and bigger paychecks. The problem is, bigger paychecks follow bigger grocery and gas bills. As a result, consumers feel confident they can afford less. What’s more, this positive atmosphere is rapidly addressing the erosion of savings accounts and soaring credit card balances. That is to say, the consumer is running out of money, while prices for rent, food and health care continue to rise.

When I’m on CNBC, people on Twitter provide ongoing commentary on just about everything any of us have to say. Comments are everywhere, but one constant is scorn, ridicule, and name-calling for comments that sound negative. It’s baffling. What should one say about a dark cloudy sky? The answer seems silly and just plain wrong.

To be clear, the markets have contracted for most of this year after peaking in January. This wasn’t pleasant, but it also didn’t usher in the apocalypse. The most important thing for those who wish to remain clear-headed is that it’s not over. Perhaps the lessons of history will turn out to be wrong and the worst may be over. In my 35 years in this industry, I’ve reaped the greatest benefits from a dispassionate focus on data. Data is what it is. If the world doesn’t end, I expect my investments to be worth more as the economy recovers and corporate America gets back on its expansive path.

Markets have more than doubled in the past decade and most investors have done well. Risk-taking is best left to others, as is cowardice. Difficult markets and economies require courage and a constant optimism to endure difficult times and look forward to clear skies.

There will be five of us for Thanksgiving dinner this year, and a 12-pound turkey will do the trick. I will count my many blessings and keep each of you among them. Thank you for your friendship, loyalty, support and kindness over these many years. I am grateful to be an American and believe that America’s future is filled with promise and wonderful, profound possibilities. We will make it together.

Michael K. Farr is a CNBC contributor and chairman and CEO of Farr, Miller & Washington.


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