Fear is inherently within us ready to surface, in the pursuit of protection. And that can be useful. For example, if my spidey senses tell me I should cross the street, I do it. In that situation, there is little downside to reacting. But in other situations, like in relationships, at work, and the markets, the fear that surfaces may not be grounded in facts. 

The recent combination of worse-than-expected inflation and bearish comments from the CEO of FedEx made the market come face-to-face with its fears — namely, fears of stagflation and recession.  

Is it just an emotional reaction? Yes and no. 

No, because I’ve had concerns for some time around inflation taking root beyond the external shocks of supply chain issues stemming from China’s COVID policy and higher energy and commodity prices from Russia’s invasion of Ukraine. Both of these could have been considered transitory (meaning they’ll go away). But the longer they are here, the less temporary they become. In addition, the job market is pretty strong, so even despite inflation (which is costing people real money) and higher interest rates (which will cost people and companies real money), this supports consumption and general demand. Eventually though, higher costs, including from the Fed through more interest rate hikes, should slow down an economy. This is certainly Fed Chair (DJ) Powell’s intention. Given that some of the aforementioned causes of inflation are out of anyone’s control, it’s possible to see a world where it sticks around but growth doesn’t — the very definition of stagflation.

But yes, because without fail, this time in the quarter is quiet. We are close to the end of Q3 and companies are preparing their financial statements in anticipation of reporting their next earnings numbers. They are generally required to be tight-lipped about what they see until those earnings come out in a few weeks — except when they announce early like FedEx. So, it’s no wonder we have limited comments from other companies on the state of their businesses to either counter or confirm FedEx’s statements. New facts are not as forthcoming. 

I’ve always equated this time to when you don’t hear from someone that you really wanted to get a text or call from. Your mind starts wandering about why you haven’t heard from them. 

For me, the bottom line is that we are in a transition.

A transition coming off a deep, very short recession that bounced into hyper market growth. Now, both the world and the markets need to find their new equilibrium — their new balance. And markets don’t like transitions (just like change is not always welcome).

I also believe there was still some hope left in the market narrative to create intermittent bounces this year. Hope that we would see inflation take an about-face. Hope that the Fed would end interest rate hikes and also even pivot to rate cuts. In essence, the hope we could all go back to what we have known for the last two decades: low inflation, low interest rates, and high valuations. 

Facing my own fears, I believe the regime we are transitioning to could have naturally higher interest rates than the last two decades, lower-than-expected earnings this year and next, and lower valuations, as a function of forward P/Es*, than we had due to higher political uncertainty and interest rates. In short, I don’t think we are done with these swings. 

What’s an investor to do with that? 

• Consider focusing a little more on quality in the form of investments that have historically had consistent earnings, low debt (because it will cost more), and maybe even pay a dividend. 

• Keep some “dry powder” in the form of cash that can now actually earn some return.

• For the parts of your portfolio that are really long term, consider sticking with it and dollar cost average, if possible.

The good news is, the markets are inherently forward looking. In my experience, as soon as the hope is fully stamped out and expectations get reset, that is usually a good sign the markets can start stabilizing. Then the surprise comments from CEOs start to be on the upside — no longer eliciting fear.

*Forward P/E = Price/earnings ratio. A measure of valuation that refers to the price or value per share investors are willing to pay for future earnings per share, usually over earnings expected over the next 12 months.

Dividends are not guaranteed and must be authorized by the company’s board of directors. Dollar cost averaging does not ensure a profit or protect against a loss in declining markets.