The first quarter of 2022 ended on a positive note, with the major market indexes regaining a significant amount of lost ground. Both the S&P 500 and the Dow Jones Industrial Average finished the quarter within 5% of where they began. Over the past three months, the markets have shown tremendous resilience during a time of geopolitical turmoil.
Bond markets have struggled this year. When interest rates go up, bond prices go down. The Federal Reserve expects to raise interest rates significantly this year. Bond markets have sold off, reflecting expectations for higher interest rates. Higher interest rates will be a drag on economic growth and should also slow the housing market. Policymakers are trying to balance the need to control inflation against the economic costs of higher interest rates. These are normal conditions in the middle to late stage of an economic cycle.
US Economic Growth: The Engine of Wealth Creation
The US consumer continues to be the driving force behind the US and global economy. Consumer spending on goods exceeded pre-COVID levels in late 2020 and has continued to set records since then. Spending on services lagged but has now reached pre-COVID levels and will continue to grow. As long as the US consumer remains unstoppable, the US economy will do well and investors in great American companies will be rewarded. Despite higher energy costs and inflation, by most measures the US consumer is doing exceptionally well.
The United States is the second-largest energy producer on the globe. We are the world’s largest oil and natural gas producer, and the third-largest food producer. American capitalism continues to produce more innovation and productivity gains than any other system. The United States is home to the broadest and most liquid capital markets. It is easy to see why the US Dollar continues to be the global reserve currency. The United States is still the world’s dominant economic power. Investors in great American companies will continue to reap the rewards of US economic growth.
If a recession happens, history says that high-quality, dividend-paying stocks are the best way to protect and grow wealth.
Interest rates and inflation are rising. Food and energy prices are likely to go higher, and it’s easy to understand why some investors are nervous about the possibility of a recession.
In the long run, stocks reflect economic growth and the growth of corporate earnings. In the short run, stock prices and the economy can often move in different directions. History has many examples of times when the economy entered a recession, and stock prices nonetheless went up. Wise investors understand that recessions are declared in hindsight. Even if we had a perfect ability to predict recessions, history says we should not sell our stocks. The best way to protect against inflation during economic expansions is also a great way to protect and grow wealth through a recession.
The best way to achieve and protect financial independence is by investing in high-quality, dividend-paying stocks. Investing in companies that earn profits, use capital wisely, and return a portion of those profits to shareholders is a time-tested and proven strategy.
As always, focus on the things you can control. Spend less than you make. Save diligently, invest wisely, and most importantly have a plan – and great advisors – for the things you can’t control.
Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer