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Q3 2022 Commentary: The Art of Economic Medicine Thumbnail

Q3 2022 Commentary: The Art of Economic Medicine

Pine Haven Investment Counsel, Inc.

Paige Johnson Roth, CFA®

Have you ever had a medical issue and wondered if the cure is worse than the condition itself? Perhaps the bad tasting medicine was almost impossible to swallow, or the odd side effects made you question if you added another issue instead of taking one away. Of course, if the medicine worked and you didn’t get the disease - or recovered from it - you really don’t have a fair comparison.

The worst moment is often when the medicine hasn’t started working and you still feel awful. It feels like our economy is in that position now, with the Federal Reserve (the Fed) attempting to combat (cure) high inflation (the disease) by increasing interest rates. By raising interest rates, they hope to ‘cool’ off the economy as higher interest rates will cause business loans, mortgage rates, and car loans to cost more and slow demand. Meanwhile, we have inflation and interest rates that are higher than they have been in quite a while. Current mortgage rates of 6-7% are somewhere near the middle of our historical ranges. At this time, we still have low unemployment.

As it is with medicine, there is always the question of getting the dosage right. In battling inflation, dosage is how fast and how much to raise interest rates. The hope is that the medicine and time will bring the economy back to more normal levels of growth, interest rates, unemployment, and inflation. There has already been a slowdown in the housing market as higher rates have cooled the buying ‘frenzies’ of last year. The slowdown may take longer in the consumer marketplace, especially this time as we recover from the COVID supply constraints.

Lately, stocks have taken a pretty good beating. Stock prices have never been a precise indicator of what companies are worth. Particularly in the short term, they are more of an indicator of what people are willing to pay for their shares. Right now, there are more sellers than buyers, which is depressing stock prices. In the long run, earnings drive stock prices.

If the Fed overcorrects (or overprescribes), we may end up in a recession. Recessions are not all bad; they often clean up excesses in the economy and ultimately make it healthier. This is the rehab and physical therapy part of our disease analogy.

Currently, our economy and financial markets are taking the medicine and it doesn’t taste or feel very good. However, it may be that much of what still could go wrong is already priced into the stock market. There is no way of knowing when the symptoms will lessen, and the markets and the economy will return to ‘normal’. However, the economy is resilient, and the unpleasantness usually doesn’t last forever.