Building and preserving wealth is a high priority in managing the financial journey of life. Whether it’s farmland and ranches, residential real estate, stocks, bonds or cash, market cycles can create a wide range of emotions. Dovish central bank action has created huge gains in paper wealth over the past three decades. The Dow Jones Industrial Average, which was around 2,000 points in the early 1990s, quintupled at the turn of the century to over 10,000 points. The index doubled to almost 20,000 points before the Great Recession and then hit 36,000 points during the pandemic. Residential real estate and farmland have been in bullish territory over the same periods, despite some large but brief corrections in some parts of the country.
It looks like the stock market, especially the S&P 500, is experiencing some major headwinds. Globally, 23 out of 34 central banks raised interest rates and/or reduced accommodative policies. Second, inflation is very persistent and may be beyond the control of central banks. Supply chain issues, conflict in Europe, labor market imbalances and rising food and energy prices are leading to persistent inflation. Some cracks are starting to occur in consumer confidence as individuals prioritize spending.
Mama and papa bear
A bear market occurs when the market undergoes a correction of at least 20%, otherwise known as a “Mama Bear”. Since 1946, this has happened nine times with an average of 14 months to return to the same value. The ugly “Papa Bear” is a market correction greater than a 40% decline. This has only happened three times since 1946 and it took an average of 58 months to return to the value before the decline began.
The Federal Reserve operates in a full employment environment and is focused on inflation. The risk of a major recession beyond a “V” shape, like what happened during the pandemic, could be imminent. The Federal Reserve would like to moderate the rate of inflation. However, supply chain issues, energy imbalances and possible global food shortages created by the Russian-Ukrainian conflict may persist. This puts central bank strategy on a tightrope. The question then becomes, what would be the impact of a recession on housing, real estate and farmland?
The long-running bear market has been in hibernation for decades due to accommodative central bank policies and globalization aspects of the global economy. Over the course of this summer and fall, it will be interesting to observe the speed and duration of any market corrections. In the long run, high quality productive assets focused on business and personal household liquidity and a good trading IQ will help manage any type of downturn and duration.
Source: David Kohl, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all of its affiliates are not responsible for any content contained in this information asset.