The current investing environment: Out of the frying pan and into the fire?

Supply chains have unkinked. Inflation has peaked. The stock market has bottomed. Next up, recession. These and other overly confident predictions based on a handful of personal anecdotes.

A little over a month ago, I read an article in The Street that perfectly summed up the challenges facing investors and traders in 2022.

“Seldom has there been such a confluence of negatives. The market had already been grappling with inflation and a hawkish Fed, and then we pile on the war in Ukraine, a huge disruption in oil and commodity markets, supply chain issues, and growing worries about the potential of a recession as the yield curve inverts. In retrospect, it was a giant Wall of Worry, and with market players already extremely negative, there was a good opportunity to start to climb.”

It was around that time I looked up out of the hole I’d dug for myself by sticking to a “buy and hold” strategy well past the point of good sense and started to notice some signs of Spring returning to the markets. My gut told me that we were either at the bottom of this wrenching stock market downturn or at least getting close.

I didn’t do much to act on that gut instinct, primarily because I didn’t have a hell of a lot of confidence in it.

In the last few weeks, however, the data points have kept piling up.

By “data points,” I mean a handful of personal anecdotes, though retreating inflation is, in fact, showing up in the official data. Just barely. In April, the Personal Consumption Expenditures index, the Federal Reserve’s preferred measure of inflation, cooled by a whopping .3% annually from the March reading.

Still, I do think there are signs popping up that supply chains are coming unsnarled, markets are bottoming and, instead of worrying about tight labor markets and spiking inflation, we probably need to start worrying about the prospects of a recession this Fall.

Here are a few things I noticed over the last month.

Retailers' earnings miss, due to high inventories.

Remember just a few months ago when our biggest shopping challenge was finding anything to buy? Remember bare shelves everywhere, thanks to supply chains that got all snarled up during the pandemic? Remember all those cargo ships hung up at ports on the West Coast?

I remember all that too, which is why it really got my attention earlier this month when both Walmart and Target missed earnings estimates, with both attributing the misses to, of all things, having too much inventory on hand.

Somehow, over the course of a month or two, retailers went from having too few goods to sell to too many goods not selling fast enough.

My backorder queue is bare.

For several months there, it seemed like I couldn’t order a damn thing that wasn’t out of stock and on backorder. Simple everyday things like a t-shirt that was on backorder for months. Parts for my Harley. Camera gear. Consumer electronics of every kind. The list of stuff I had waiting on backorder was as long as my arm.

Today, not only has all that stuff shipped, but I can’t think of a recent example of anything I’ve bought that has taken more than a few days to show up at my door.

Rental cars are up, travel is down.

Remember back when pandemic restrictions were lifted last year and people started flying around the country only to find they either couldn’t get a rental car or had to pay an astronomical price?

We just got back from a trip to Napa, California. We picked up a rental car at San Francisco International Airport. On Memorial Day weekend, usually a hugely busy travel weekend, the rental car garage was packed with available cars.

That seems to suggest two important economic changes.

First, so much for the chip shortage that had such an impact on new car shipments, especially the kind of low-margin cars that are sold to rental car companies.

Second, my purely anecdotal experience is that travel on that usually busy holiday weekend was way, way down compared to past years. It wasn’t just the plethora of available rental cars. There were empty seats on our flight, minimal lines at two usually busy airports, and little traffic on the freeways.

I bought an RV at exactly the wrong time.

During the pandemic, I was one of those people who got all obsessed with camper vans and the lure of #vanlife. My wife and I both recently retired from our day jobs, and traveling around the country with two people and two dogs crammed into a 20-foot converted cargo van seemed attractive. In a masochistic sort of way.

The problem was finding a van. I had a particular model in mind, but the waitlist for a new one was way over a year long. I joined a Facebook group devoted to that van model in hopes of finding a used one. The very few that came on the market were snapped up almost instantly, even when priced way above MSRP for a new model. Eventually, I joined the lemmings, overpaying for a 2-year-old used model, thinking that there wasn’t much choice if I wanted a van in this environment.

As if by (black) magic, within a couple of weeks of my very expensive impulse purchase, used vans started popping up for sale all over the place. The owners frequently cited “changed life circumstances” as the reason for dumping a van they bought a year ago. “Changed circumstances” likely being a euphemism for

“My boss is forcing me back to work. My #vanlife dreams are over. I owe $130k on this tiny house on wheels that gulps diesel at $7.00 a gallon. Get me out of this, please!”

Real estate demand seems to be dropping fast.

We live in a suburb of Boulder, Colorado. During the pandemic, Colorado real estate prices surged to insanely high levels as people from San Francisco and New York hightailed it out of the city and bid up the impossibly tight inventory of existing homes.

That situation seems to have very suddenly changed. A couple of weeks ago, one of the local realtors left a flyer on our door, with a headline stating there is more supply on our local market now than at any time over the last two years. I recently read that real estate transactions nationwide recently dropped by 2.4% from the prior month and are down almost 6% from a year ago.

Good results are rewarded.

For the last several months, the prevailing strategy for stock investors has been “sell the news.” Good news, bad news. Didn’t matter. Stocks that beat earnings sold off. Stocks that missed on earnings sold off. Actual results just didn’t matter very much.

I think that’s starting to change. I noticed it most recently in the reaction to Zoom’s latest earnings announcement. For months, it was like that company could do no right in investors’ eyes. No matter the results, the stock sold off.

Then, two weeks ago, Zoom announced fairly solid, if not spectacular, results and the stock went . . . up. It wasn’t a surge by any means, but for the first time in what feels like forever, investors seemed to get into the nuances of the fundamentals and pronounced them sufficient for a small bump up.

Legal channel checks

Before retiring a year ago, I was a partner in a large international law firm. I still have many friends in that world. Recently, they started complaining about work slowdowns on the corporate side. If the deal guys are seeing workflow drop, that’s a very solid indicator that financing is tightening up and possibly that the economy is cooling off.

So, are we headed for a recession? I suspect so, but who really knows?

I’m glad the Federal Reserve is acting to bring down inflation. Yet, I’m also concerned that there is a mismatch between the nature of the problem and the Fed’s available tools to fix it. This surge in prices has been more about pandemic-related supply chain problems than about spiking demand, and interest rates don’t have much to do with consumers bidding up the price of goods because there aren’t enough goods available for sale.

The Fed is pulling some liquidity from the market, which needed to happen, but if the supply constraints suddenly evaporate (as I think is happening), the Fed could easily overshoot on interest rates. Their track record of engineering soft landings is not good under the best of circumstances, and this ultra-complicated, multi-front geopolitical mess of pandemics and wars we find ourselves in is hardly the best of circumstances.

Strap in. It may get bumpy.