The U.S. economy has experienced prolonged volatility in 2022 as the pandemic, geopolitical tensions, and inflationary pressure have had serious impacts on the world. As the Federal Reserve continues to hike interest rates, more people are asking, “Is a sustained recession inevitable? If so, how serious can we expect it to be?”
While the first half of 2022 has shown leading indicators of a recession, there are also many positive economic factors at play which gives us great optimism for the future. Let’s take a deeper look.
Main Concerns in the U.S. and Global Economy
- High inflation
- Aggressive Monetary Policy Tightening
- Russia’s War in Ukraine
- Covid-19 Lockdowns and Restrictions
- Housing Crisis in China
- The S&P 500 posted its worst start to the year in 50+ years
Strong Economic Factors
- Solid Corporate Balance Sheets
- Robust Job Market
- Overall demand for goods and services appears strong
- Inflation is Decelerating
- Wholesale prices fell for the first time in two years
Central Banks and Interest Rates
With so many factors weighing heavily on the global economy, central banks are weighing a difficult trade off. Do we want to live with high inflation, or dampen economic growth?
What Can We Expect
- Aggressive Fed policy
- Living with inflation
- Turning of the liquidity tide
- Slower economic growth
- Better returns for fixed income investors in Q2 now that interest rates are higher
The Real Estate Market
Mortgage rates have spiked significantly, resulting in higher borrowing costs. Over time, the difference between a 30-YR mortgage at 3% vs 6% translates to six figures (or more!) in additional payments over time.
Mortgage applications for both new home purchases and refinancings have declined this year, cooling down the red-hot housing market.
In Summary
Inflation is high, investor anxiety is high, and the future economic outlook is uncertain.
As reminded by Warren Buffett at this year’s investor conference, history demonstrates that markets cannot be successfully timed:
“I don’t think we’ve ever made [an investment] decision where either one of us has either said or been thinking: ‘We should buy or sell based on what the market is going to do,” Buffett added, referring to his longtime business partner Charlie Munger. “Or, for that matter, what the economy is going to do.” (Source: Yahoo Finance, April 2022)
In the face of market uncertainty, we strongly recommend investing with a long-term view in mind and rebalancing your portfolio according to your specific long-term financial planning goals and investment strategy.
To access a more comprehensive economic analysis, click here to access Schwab’s latest market and economic insights.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA