There are a lot of scary words circulating with “recession” and “inflation” at the top of the list. People are worried about the economy and the Federal Reserve has not helped because it is steadily raising interest rates. That works in theory as a check on inflation, but usually makes money more expensive, affecting mortgage rates, credit card rates, and basically all the money people borrow in the future.
That has steadily pushed the Dow Jones Industrial Average down. The index fell nearly 500 points on September 23, reaching a low for 2022. Broadly speaking. it’s not just the Dow, the Nasdaq has been steadily declining as well.
We all know the story and understand the fears, but the market’s fear of what might happen doesn’t match what’s really happening in the US economy.
The US economy has been strong
Clearly, inflation has hit many lower-income Americans hard. But the labor market remains strong with an unemployment rate of 3.7%. That’s not exactly an all-time low, but it’s in that range. In addition, there is exactly half of an available job seeker for every available vacancy. That’s actually an all-time low since the Bureau of Labor Statistics tracked that data.
Vacancies don’t always mean good jobs though, wages have also risen in the service sector and even fast food jobs. walmart (WMT) Target (TGT) , yum! Brands (YUM) Starbucks (SBUX) and a number of other retailers have embraced a $15 minimum wage.
And while the labor market remains strong, the downside is rising housing costs combined with higher mortgage rates. That’s not good news for people buying a home (even if history suggests they still should), but it has a downside. If you own a home, it has become a fast-growing asset that increases your wealth.
The economy is, of course, personal. If you can’t find a job or can’t afford to live where you want, it’s very real. In general, however, there are many signs that the economy remains strong and that many of the problems we face are related to what could be called a pandemic hangover.
Market declines are the best times to invest
Many of my favorite companies are down 30% or more. I don’t stop believing in Costco (COST) Walt Disney (DIS) or Microsoft (MSFT) (just to name a few) because their stock prices have fallen. In fact, I look at all three of these companies and how they have handled the pandemic and prepared for the future, and I feel better about it.
Share price does not always equate to short-term performance. For example, Disney has the best intellectual property (IP) of any entertainment company and has endless pricing power. If you’ve been offered “Any Other Company’s IP” or that of Disney, you can even argue to take Disney.
Costco has just achieved one of its highest renewal rates ever (over 92%) and continues to add members. Microsoft has only gotten stronger as it moves more fully towards a software-as-a-service model, but all three of those companies have seen double-digit inventory declines this year.
In a bad market, I cling to the mantra “time in the market beats timing the market.” Now is the time to expand your holdings in really strong companies. Remember that good companies are now on sale, in some cases really big sales, and add strategically to your long-term holdings.
After that, remember that long term means years. Check in with the companies you own to make sure they’ve stayed on track, but don’t check your portfolio every day. A market decline feels bad, but historically it means nothing. Good companies will recover and invest in them, plus time (perhaps a lot of time) is what makes investors rich.