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Interest rates are soaring and the stock market is in a free fall. If you’ve been around, you know that recessions are a normal part of our economic cycles. It’s articulated clearly in the NAHREP 10. The former Fed Chairman Alan Greenspan coined the phrase “irrational exuberance” prior to the dot-com bust of 2000. I think it is fair to say that the real estate market has recently been swamped with irrational exuberance and it shouldn’t be a surprise that the market is likely heading towards a correction. The same is true for the tech sector of the stock market. Companies like Peloton, PayPal, and Meta (Facebook), saw their stock prices soar to the stratosphere during the pandemic, only to lose between 50% and 95% of their value in 2022. Our economy is more delicate than most people realize.
The domino effect of one global event is astonishing. The war in Ukraine is driving oil prices to all-time highs. Higher gas prices are causing inflation to spike around the globe, which in turn is pushing interest rates upward. Higher interest rates make capital more expensive which compresses profit margins and drives stock prices lower. Lower stock prices prompt companies to reduce expenses, which typically means layoffs. When people are out of work, they spend less which lowers earnings for companies, and so on…Once the economy gets into a negative cycle it’s tough to turn things around quickly. Our labor market is tight right now, but that could change soon.
History has shown us that recessions are followed by bull markets. The deeper the recession, the stronger the bounce. The great recession of 2008 to 2012 was followed by the longest bull market in history – in both real estate and the stock market. One of the worse things about recessions is they always make the rich richer and the poor poorer. It’s sad but true. The rich and savvy have cash. They can wait patiently on the sidelines while the market is tanking and start to buy more assets when the market begins to turn. People who have less wealth frequently have to sell assets at a discount to survive when the market is weak, and they miss out on the gains when the market turns. People who believe in conspiracies believe that recessions are manufactured intentionally – specifically to fleece the poor out of the little wealth they own. I don’t believe it, but I can understand how some people can.
What is your plan? How do you intend not only to survive but thrive in the coming 36 months? Holding a lot of cash seemed like a stupid idea a few months ago, but it looks pretty smart now. There will be some real bargains in the next few months. Income-producing real estate and stocks are your best bet. Investing in assets solely because you think they will be worth a lot more in the future is probably going to get a lot of people hurt. That’s why the crypto market is crashing. Cryptocurrency produces no income and is purely speculative. You are betting that someone will pay more for the asset than you did. That’s a big risk in a down market. Even in a recession people still need the basics. Food, medicine, toothpaste, etc. Value stocks are a good place to hold your money in times like these. My humble prediction is that the recession will hit later this year and could last 12-18 months. The market will turn around swiftly and asset prices will surpass all-time highs in late 2024. We’ll see…
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