The Dow Jones average suffered its worst beating since October 2020 on Friday, capping a fourth straight weekly decline on the news that the Federal Reserve will raise interest rates by at least a half point at its meeting next month. The Fed’s hawkish signaling, with 50-basis-point rate hikes expected over the next few meetings has sent Treasury yields sharply higher. An inversion in the 2-year and 10-year Treasury yield curve was pointed to as a signal of an upcoming recession. The Goldman Sachs economics team says that there is now a 35% chance of a U.S recession over the next two years, with the labor market a particular problem for the Federal Reserve.

Elsewhere, Russia may be on the verge of default. If Russia doesn’t pay up in dollars by the time its grace period expires on May 4, it would be the country’s first default on external debt in more than a century. And the sanctions are hitting the country hard. 

Given this backdrop, for investors, anything but playing it safe would be akin to playing with fire.

Future Wealth’s View

Q1 Earnings season has been a major disappointment – all the major banks reported double-digit earnings decline in the first quarter. Netflix got completely destroyed with massive subscriber drop off. And we have another two weeks of earnings left from other major US companies. The picture is not pretty. The kicker is that the effects of sanctions on Russia have not even impacted any of these companies yet. While many companies are quick to state that they have minimal exposure to Russia – that is missing the big picture. Germany and other European countries are counting on gas and other commodities from Russia and have yet to figure out ways to stave off a massive recession absent those resources. If Europe struggles, US companies will feel the pain.

The IMF (International Monetary Fund) cut global growth to 3.6% in 2022 from 6.1% in 2021. Europe will almost certainly plunge into a recession and China is a mess. This brings us back to what will happen in the US. The Fed wants to engineer a soft landing but the institution has lost all credibility. Our view, at Future Wealth LLC, is that we may be witnessing the first signs of a potential global recession in 2023 unless the Fed gets it right.

If investors have not already moved their portfolio into value stocks and safe instruments and instead keeping their hopes on high growth technology holdings, here is harsh reality – when the tide goes out in one place, it goes out everywhere. When large institutions begin to lose money in Russia and China, they begin to unload on risky investments in the US, Europe, India, Brazil and everywhere else. One may ask “Why bail out of all the investments?”. The answer lies in the famous expression – “The less one knows about how sausages are made, the better they sleep at night”.